MAXXAM GROUP HOLDINGS INC
10-K, 1999-03-31
PRIMARY PRODUCTION OF ALUMINUM
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                               UNITED STATES
                     SECURITIES AND EXCHANGE COMMISSION
                          WASHINGTON, D.C.  20549

                                 FORM 10-K

                              ---------------


               ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
                   OF THE SECURITIES EXCHANGE ACT OF 1934

 FOR THE FISCAL YEAR ENDED                             COMMISSION FILE
     DECEMBER 31, 1998                                 NUMBER 333-18723



                         MAXXAM GROUP HOLDINGS INC.
           (Exact name of Registrant as Specified in its Charter)

          DELAWARE                             76-0518669
      (State or other                       (I.R.S. Employer
       jurisdiction                      Identification Number)
     of incorporation or
       organization)

5847 SAN FELIPE, SUITE 2600                      77057
       HOUSTON, TEXAS                          (Zip Code)
   (Address of Principal
     Executive Offices)

     Registrant's telephone number, including area code: (713) 975-7600

                              ---------------

        Securities registered pursuant to Section 12(b) of the Act:

                                   None.


        Securities registered pursuant to Section 12(g) of the Act:

                                   None.

                              ---------------

     Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the Registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
Yes /X/   No /  /

             All of the Registrant's voting stock is held by an
                        affiliate of the Registrant.

  Number of shares of Common Stock outstanding at March 29, 1999: 1,000

     REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION
(I)(1)(A) AND (B) OF FORM 10-K AND IS THEREFORE FILING THIS FORM WITH THE
REDUCED DISCLOSURE FORMAT.

                    DOCUMENTS INCORPORATED BY REFERENCE:

                              Not applicable.

                              ---------------

                             TABLE OF CONTENTS


                                   PART I

Item 1.   Business                                           2
               General                                       2
               Forest Products Operations
                    Pacific Lumber Operations                2
                    Britt Lumber Operations                  9
                    Regulatory and Environmental Factors
                         and Headwaters Agreement            9
                    Aluminum Operations                     15

Item 2.   Properties                                        18

Item 3.   Legal Proceedings                                 18

Item 4.   Submission of Matters to a Vote of
               Security Holders                             21

                                  PART II

Item 5.   Market for Registrant's Common Equity and
               Related Stockholder Matters                  21

Item 6.   Selected Financial Data                           21

Item 7.   Management's Discussion and Analysis
               of Financial Condition and
               Results of Operations                        21

Item 7a.  Quantitative and Qualitative Disclosures
               About Market Risk                            29

Item 8.   Financial Statements and Supplementary Data
               Report of Independent Public Accountants     30
               Consolidated Balance Sheet                   31
               Consolidated Statement of Operations         32
               Consolidated Statement of Cash Flows         33
               Consolidated Statement of Stockholder's
                    Deficit                                 34
               Notes to Consolidated Financial Statements   35

Item 9.   Changes in and Disagreements with Accountants
               on Accounting and Financial Disclosure       49

                                  PART III

Items
  10-13.  Not applicable.

                                  PART IV

Item 14.  Exhibits, Financial Statement Schedules,
               and Reports on Form 8-K                      49


                                   PART I


ITEM 1.        BUSINESS

GENERAL

          MAXXAM Group Holdings Inc. (the "COMPANY" or "MGHI") is a wholly
owned subsidiary of MAXXAM Inc. ("MAXXAM").  The Company's wholly owned
subsidiary, MAXXAM Group Inc. ("MGI"), and MGI's wholly owned subsidiaries,
The Pacific Lumber Company ("PACIFIC LUMBER") and Britt Lumber Co., Inc.
("BRITT"), are engaged in forest products operations.  Pacific Lumber's
principal wholly owned subsidiaries are Scotia Pacific Company LLC ("SCOTIA
LLC") and Salmon Creek Corporation ("SALMON CREEK").  As used herein, the
terms "Company," "MGHI," "MGI," "Pacific Lumber," "Kaiser" or "MAXXAM"
refer to the respective companies and their subsidiaries, unless otherwise
noted or the context indicates otherwise.

          Pacific Lumber, which has been in continuous operation for over
130 years, engages in several principal aspects of the lumber industry--the
growing and harvesting of redwood and Douglas-fir timber, the milling of
logs into lumber products and the manufacturing of lumber into a variety of
value-added finished products.  Britt manufactures redwood fencing and
decking products from small diameter logs, a substantial portion of which
Britt acquires from Pacific Lumber (as Pacific Lumber cannot efficiently
process them in its own mills).  The Company also owns 27,938,250 shares of
the common stock of Kaiser Aluminum Corporation ("KAISER"), representing a
35.4% interest in Kaiser.  MAXXAM has a direct interest in Kaiser of 27.9%. 
Kaiser is a publicly traded company (New York Stock Exchange trading symbol
"KLU") which operates in all principal aspects of the aluminum industry--
the mining of bauxite, the refining of bauxite into alumina, the production
of primary aluminum from alumina, and the manufacture of fabricated
(including semi-fabricated) aluminum products.

          This Annual Report on Form 10-K contains statements which
constitute "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995.  These statements appear in a
number of places (see Item 1. "Business--Forest Products Operations--
Regulatory and Environmental Factors and Headwaters Agreement" and "--
Aluminum Operations," Item 3. "Legal Proceedings" and Item 7. "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Background," "--Financial Condition and Investing and Financing Activities"
and "--Trends").  Such statements can be identified by the use of forward-
looking terminology such as "believes," "expects," "may," "estimates,"
"will," "should," "plans" or "anticipates" or the negative thereof or other
variations thereon or comparable terminology, or by discussions of
strategy.  Readers are cautioned that any such forward-looking statements
are not guarantees of future performance and involve significant risks and
uncertainties, and that actual results may vary materially from those in
the forward-looking statements as a result of various factors.  These
factors include the effectiveness of management's strategies and decisions,
general economic and business conditions, developments in technology, new
or modified statutory or regulatory requirements and changing prices and
market conditions.  This report  identifies other factors that could cause
such differences.  No assurance can be given that these are all of the
factors that could cause actual results to vary materially from the
forward-looking statements.

FOREST PRODUCTS OPERATIONS

     PACIFIC LUMBER OPERATIONS

          Consummation of Headwaters Agreement
          On March 1, 1999, Pacific Lumber, Scotia LLC  and Salmon Creek
(collectively, the "COMPANIES") consummated the Headwaters Agreement (the
"HEADWATERS AGREEMENT") with the United States and California.  See "--
Regulatory and Environmental Factors and Headwaters Agreement."  Pursuant
to the terms of the Headwaters Agreement, approximately 5,600 acres of
timberlands  known as the Headwaters Forest and the Elk Head Springs Forest
(the "HEADWATERS TIMBERLANDS") owned by the Companies were transferred to
the United States.  In consideration for the transfer of the Headwaters
Timberlands, Salmon Creek was paid $299,850,000, Scotia LLC was paid
$150,000 and approximately 7,700 acres of timberlands known as the Elk
River Timberlands (the "ELK RIVER TIMBERLANDS") were transferred to Pacific
Lumber (and will be transferred to Scotia LLC within 180 days of
consummation of the Headwaters Agreement).  The 7,700 acres of Elk River
Timberlands were out of a total of approximately 9,470 acres for which the
United States and California paid third party owners approximately $78
million. In addition, upon consummation of the Headwaters Agreement (i)
habitat conservation and sustained yield plans were approved covering the
Scotia LLC Timberlands (as defined below), (ii) California agreed to
purchase Scotia LLC's  Owl Creek grove and a portion of Pacific Lumber's
Grizzly Creek grove, and (iii) the Companies dismissed takings litigation
pending against the United States and California.   The net proceeds from
the sale of the Headwaters Timberlands and the portion of the Grizzly Creek
grove to be sold are to be held in escrow to support the Timber Notes, and
are to be released only under certain circumstances.  Consequently, Salmon
Creek deposited approximately $285 million of the proceeds from the sale of
the Headwaters Timberlands into escrow pursuant to an Escrow Agreement. 
See "--Regulatory and Environmental Factors and Headwaters Agreement--
Escrow Agreement."

          Timber and Timberlands
          After giving effect to the transfers of timberlands under the
Headwaters Agreement, Pacific Lumber owns and manages approximately 220,000
acres of virtually contiguous commercial timberlands located in Humboldt
County along the northern California coast, an area which has very
favorable soil and climate conditions for growing timber.  These
timberlands contain approximately 80% redwood and 18% Douglas-fir and other
timber, are located in close proximity to Pacific Lumber's four sawmills
and contain an extensive network of roads.  Including the pending transfer
from Pacific Lumber to Scotia LLC of the Elk River Timberlands,
approximately 206,000 acres of Pacific Lumber's timberlands are owned by
Scotia LLC (the "SCOTIA LLC TIMBERLANDS").  In addition, Scotia LLC has the
exclusive right to harvest (the "SCOTIA LLC TIMBER RIGHTS") approximately
12,200 acres of Pacific Lumber's timberlands.  The timber in respect of the
Scotia LLC Timberlands and the Scotia LLC Timber Rights is collectively
referred to as the "SCOTIA LLC TIMBER."  Substantially all of Scotia LLC's
assets are pledged as security for Scotia LLC's 6.55% Class A-1 Series B
Timber Collateralized Notes, 7.11% Class A-2 Series B Timber Collateralized
Notes and 7.71% Class A-3 Series B Timber Collateralized Notes
(collectively the "TIMBER NOTES").  Pacific Lumber harvests and purchases
from Scotia LLC all of the logs harvested from the Scotia LLC Timber.  See
"--Relationships with Scotia LLC and Britt" for a description of this and
other relationships among Pacific Lumber, Scotia LLC and Britt.

          The forest products industry grades lumber in various
classifications according to quality.  The two broad categories within
which all grades fall, based on the absence or presence of knots, are
called "upper" and "common" grades, respectively.  "Old growth" trees,
often defined as trees which have been growing for approximately 200 years
or longer, have a higher percentage of upper grade lumber than "young
growth" trees (those which have been growing for less than 200 years). 
"Virgin" old growth trees are located in timber stands that have not
previously been harvested.  "Residual" old growth trees are located in
timber stands which have been partially harvested in the past.

          Pacific Lumber engages in extensive efforts to supplement the
natural regeneration of timber and increase the amount of timber on its
timberlands.  Pacific Lumber is required to comply with California forestry
regulations regarding reforestation, which generally require that an area
be reforested to specified standards within an established period of time. 
Pacific Lumber also actively engages in efforts to establish timberlands
from open areas such as pasture land.  Regeneration of redwood timber
generally is accomplished through the natural growth of new redwood sprouts
from the stump remaining after a redwood tree is harvested.  Such new
redwood sprouts grow quickly, thriving on existing mature root systems.  In
addition, Pacific Lumber supplements natural redwood regeneration by
planting redwood seedlings.  Douglas-fir timber grown on Pacific Lumber's
timberlands is regenerated almost entirely by planting seedlings.  During
1998, Pacific Lumber planted approximately 1.2 million redwood and Douglas-
fir seedlings.

          California law requires timber owners such as Pacific Lumber to
demonstrate that their operations will not decrease the sustainable
productivity of their timberlands.  A timber company may comply with this
requirement by submitting a Sustained Yield Plan ("SYP") to the California
Department of Forestry ("CDF") for review and approval.  An SYP contains a
timber growth and yield assessment, which evaluates and calculates the
amount of timber and long-term production outlook for a company's
timberlands, a fish and wildlife assessment, which addresses the condition
and management of fisheries and wildlife in the area, and a watershed
assessment, which addresses the protection of aquatic resources.  The
relevant regulations require determination of a long-term sustained yield
("LTSY") harvest level, which is the average annual harvest level that the
management area is capable of sustaining in the last decade of a 100-year
planning horizon.  The LTSY is determined based upon timber inventory,
projected growth and harvesting methodologies, as well as soil, water, air,
wildlife and other relevant considerations.  The SYP must demonstrate that
the average annual harvest over any rolling ten-year period within the
planning horizon does not exceed the LTSY. 

          Pacific Lumber is also subject to federal and state laws
providing for the protection and conservation of wildlife species which
have been designated as endangered or threatened, certain of which are
found on Pacific Lumber's timberlands.  These laws generally prohibit
certain adverse impacts on such species (referred to as a "TAKE"), except
for incidental takes which do not jeopardize the continued existence of the
affected species and which are made in accordance with an approved Habitat
Conservation Plan ("HCP") and related incidental take permit.  An HCP
analyzes the impact of the incidental take and specifies measures to
monitor, minimize and mitigate such impact.  In connection with the
consummation of the Headwaters Agreement, Scotia LLC and Pacific Lumber
reached agreement with various federal and state regulatory agencies with
respect to an SYP ("FINAL SYP") and a multi-species HCP ("FINAL HCP,"
together with the Final SYP, the "FINAL PLANS").  See "--Regulatory and
Environmental Factors and Headwaters Agreement."

          Harvesting Practices
          The ability of Pacific Lumber to sell logs or lumber products
will depend, in part, upon its ability to obtain regulatory approval of
timber harvesting plans ("THPS").  THPs are required to be developed by
registered professional foresters and must be filed with, and approved by,
the CDF prior to the harvesting of timber.  Each THP is designed to comply
with applicable laws and regulations, including the requirements of the
Final Plans (as defined below).  During the second half of 1998 and
continuing through the first quarter of 1999, Pacific Lumber has
experienced an absence of a sufficient number of available THPs available
for harvest to enable it to conduct its operations at 1997 levels.  See
Item 7.  "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Results of Operations--Operating Results."  However,
with the adoption of the Final Plans in connection with the consummation of
the Headwaters Agreement, Pacific Lumber anticipates, although it can give
no assurances, that after a transition period, the implementation of the
Final Plans will streamline the process of preparing THPs and potentially
shorten the time required to obtain approvals of THPs.

          Pacific Lumber maintains a detailed geographical information
system covering its timberlands (the "GIS").  The GIS covers numerous
aspects of Pacific Lumber's properties, including timber type, tree class,
wildlife data, roads, rivers and streams.  By carefully monitoring and
updating this data base and conducting field studies, Pacific Lumber's
foresters are better able to develop detailed THPs addressing the various
regulatory requirements.  Pacific Lumber also utilizes a Global Positioning
System ("GPS") which allows precise location of geographic features through
satellite positioning.

          Pacific Lumber employs a variety of well-accepted methods of
selecting trees for harvest.  These methods, which are designed to achieve
optimal regeneration, are referred to as "silvicultural systems" in the
forestry profession.  Silvicultural systems range from very light thinnings
aimed at enhancing the growth rate of retained trees to clear cutting which
results in the harvest of all trees in an area and replacement with a new
forest stand.  In between are a number of varying levels of partial
harvests which can be employed. 

          Production Facilities
          Pacific Lumber owns four highly mechanized sawmills and related
facilities located in Scotia, Fortuna and Carlotta, California.  The
sawmills historically have been supplied almost entirely from timber
harvested from Pacific Lumber's timberlands.  Since 1986, Pacific Lumber
has implemented numerous technological advances that have increased the
operating efficiency of its production facilities and the recovery of
finished products from its timber.  Over the past three years, Pacific
Lumber's annual lumber production has averaged approximately 277 million
board feet, with approximately 230, 309 and 291 million board feet produced
in 1998, 1997 and 1996, respectively.  The Fortuna sawmill produces
primarily common grade lumber.  During 1998, the Fortuna mill produced
approximately 89 million board feet of lumber.  The Carlotta sawmill
produces both common and upper grade redwood lumber.  During 1998, the
Carlotta mill produced approximately 56 million board feet of lumber. 
Sawmills "A" and "B" are both located in Scotia.  Sawmill "A" processes
Douglas-fir logs and Sawmill "B" primarily processes large diameter redwood
logs.  During 1998, Sawmills "A" and "B" produced 55 million and 30 million
board feet of lumber, respectively.  Pacific Lumber has partially curtailed
operations at all of its sawmills due to an abnormally small inventory of
logs because of  the absence of a sufficient number of available THPs to
conduct harvesting at historic levels.  It expects such curtailments to
continue for the next several months.  See Item 7.  "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Results of Operations--Preliminary 1999 Results."

          Pacific Lumber operates a finishing and remanufacturing plant in
Scotia which processes rough lumber into a variety of finished products
such as trim, fascia, siding and paneling.  These finished products include
the redwood lumber industry's largest variety of customized trim and fascia
patterns.  Remanufacturing enhances the value of some grades of lumber by
assembling knot-free pieces of narrower and shorter lumber into wider or
longer pieces in its state-of-the-art end and edge glue plants.  The result
is a standard sized upper grade product which can be sold at a significant
premium over common grade products.  Pacific Lumber has also installed a
lumber remanufacturing facility at its mill in Fortuna which processes low
grade redwood common lumber into value-added, higher grade redwood fence
and related products.

          Pacific Lumber dries the majority of its upper grade lumber
before it is sold.  Upper grades of redwood lumber are generally air-dried
for three to twelve months and then kiln-dried for seven to twenty-four
days to produce a dimensionally stable and high quality product which
generally commands higher prices than "green" lumber (which is lumber sold
before it has been dried).  Upper grade Douglas-fir lumber is generally
kiln-dried immediately after it is cut.  Pacific Lumber owns and operates
34 kilns, having an annual capacity of approximately 95 million board feet,
to dry its upper grades of lumber efficiently in order to produce a
quality, premium product.  Pacific Lumber also maintains several large
enclosed storage sheds which hold approximately 27 million board feet of
lumber.

          In addition, Pacific Lumber owns and operates a modern
25-megawatt cogeneration power plant which is fueled almost entirely by the
wood residue from Pacific Lumber's milling and finishing operations.  This
power plant generates substantially all of the energy requirements of
Scotia, California, the town adjacent to Pacific Lumber's timberlands where
several of its manufacturing facilities are located.  Pacific Lumber sells
surplus power to Pacific Gas and Electric Company.  In 1998, the sale of
surplus power accounted for approximately 2% of Pacific Lumber's total
revenues.

          Products
          The following table sets forth the distribution of Pacific
Lumber's lumber production (on a net board foot basis) and revenues by
product line:

<TABLE>
<CAPTION>

                              YEAR ENDED DECEMBER 31, 1998              YEAR ENDED DECEMBER 31, 1997
                       ----------------------------------------  ----------------------------------------
                         % OF TOTAL                                % OF TOTAL
                           LUMBER      % OF TOTAL                    LUMBER      % OF TOTAL
                         PRODUCTION      LUMBER      % OF TOTAL    PRODUCTION      LUMBER      % OF TOTAL
       PRODUCT             VOLUME       REVENUES      REVENUES       VOLUME       REVENUES      REVENUES
                       ------------  ------------  ------------  ------------  ------------  ------------
<S>                    <C>           <C>           <C>           <C>           <C>           <C>
Upper grade redwood
     lumber                     14%           35%           29%           12%           34%           29% 
Common grade redwood
     lumber                     58%           49%           41%           55%           42%           35% 
                       ------------  ------------                ------------  ------------  ------------
     Total redwood
          lumber                72%           84%           70%           67%           76%           64% 
                       ------------  ------------  ------------  ------------  ------------  ------------
Upper grade Douglas-
     fir lumber                  3%            5%            4%            4%            6%            5% 
Common grade Douglas-
     fir lumber                 22%           10%            8%           25%           16%           13% 
                       ------------  ------------  ------------  ------------  ------------  ------------
     Total Douglas-
          fir lumber            25%           15%           12%           29%           22%           18% 
                       ------------  ------------  ------------  ------------  ------------  ------------
Other grades of
     lumber                      3%            1%            1%            4%            2%            2% 
                       ------------  ------------  ------------  ------------  ------------  ------------
          Total lumber         100%          100%           83%          100%          100%           84% 
                       ============  ============  ============  ============  ============  ============

Logs                                                         6%                                        7% 
                                                   ============                              ============

Hardwood chips                                               3%                                        3% 
Softwood chips                                               3%                                        4% 
                                                   ------------                              ------------
     Total wood chips                                        6%                                        7% 
                                                   ============                              ============

</TABLE>

          Lumber.  In 1998, Pacific Lumber sold approximately 252 million
board feet of lumber (including 5.0 million of intersegment sales to
Britt), which accounted for approximately 83% of Pacific Lumber's total
revenues.  Lumber products vary greatly by the species and quality of the
timber from which it is produced.  Lumber is sold not only by grade (such
as "upper" grade versus "common" grade), but also by board size and the
drying process associated with the lumber.

          Redwood lumber is Pacific Lumber's largest product category. 
Redwood is commercially grown only along the northern coast of California
and possesses certain unique characteristics that permit it to be sold at a
premium to many other wood products.  Such characteristics include its
natural beauty, superior ability to retain paint and other finishes,
dimensional stability and innate resistance to decay, insects and
chemicals.  Typical applications include exterior siding, trim and fascia
for both residential and commercial construction, outdoor furniture, decks,
planters, retaining walls and other specialty applications.  Redwood also
has a variety of industrial applications because of its chemical resistance
and because it does not impart any taste or odor to liquids or solids.

          Upper grade redwood lumber, which is derived primarily from large
diameter logs and is characterized by an absence of knots and other
defects, is used primarily in distinctive interior and exterior
applications.  The overall supply of upper grade lumber has been
diminishing due to increasing environmental and regulatory restrictions and
other factors.  See Item 7. "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Background."  Common grade
redwood lumber, Pacific Lumber's largest volume product, has many of the
same aesthetic and structural qualities of redwood uppers, but has some
knots, sapwood and a coarser grain.  Such lumber is commonly used for
construction purposes, including outdoor structures such as decks, hot tubs
and fencing.

          Douglas-fir lumber is used primarily for new construction and
some decorative purposes and is widely recognized for its strength, hard
surface and attractive appearance.  Douglas-fir is grown commercially along
the west coast of North America and in Chile and New Zealand.  Upper grade
Douglas-fir lumber is derived primarily from old growth Douglas-fir timber
and is used principally in finished carpentry applications.  Common grade
Douglas-fir lumber is used for a variety of general construction purposes
and is largely interchangeable with common grades of other whitewood
lumber.

          Logs.  Pacific Lumber currently sells certain logs that, due to
their size or quality, cannot be efficiently processed by its mills into
lumber.  The majority of these logs are purchased by Britt.  The balance
are purchased by surrounding mills which do not own sufficient timberlands
to support their mill operations.  See "--Relationships with Scotia LLC and
Britt" below.  Except for the agreement with Britt described below, Pacific
Lumber does not have any significant contractual relationships with third
parties relating to the purchase of logs.  Pacific Lumber has historically
not purchased significant quantities of logs from third parties; however,
Pacific Lumber may from time to time purchase logs from third parties for
processing in its mills or for resale to third parties if, in the opinion
of management, economic factors are advantageous to Pacific Lumber.

          Wood Chips.  Pacific Lumber uses a whole-log chipper to produce
wood chips from hardwood trees which would otherwise be left as waste. 
These chips are sold to third parties primarily for the production of
facsimile and other specialty papers.  Pacific Lumber also produces
softwood chips from the wood residue from its milling operations.  These
chips are sold to third parties for the production of wood pulp and paper
products.

          Backlog and Seasonality
          Pacific Lumber's backlog of sales orders at December 31, 1998 and
1997 was approximately $16.8 and approximately $26.4 million, respectively,
the substantial portion of which was delivered in the first quarter of the
next fiscal year.  The decline in the sales backlog from 1997 to 1998 was
principally due to a diminished supply of THPs which reduced the volume of
logs available for the production of lumber products.  See Item 7.
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Results of Operations--Recent Operating Results." Pacific
Lumber has historically experienced lower first quarter sales due largely
to the general decline in construction-related activity during the winter
months.  As a result, Pacific Lumber's results in any one quarter are not
necessarily indicative of results to be expected for the full year. The
seasonality of Pacific Lumber's business is expected to become more
pronounced because of the harvesting restrictions imposed by the Final
Plans. See "--Regulatory and Environmental Factors and Headwaters
Agreement" and Item 7.   "Managements' Discussion and Analysis of Financial
Condition and Results of Operations--Background."

          Other
          The Company also derives revenues from a soil amendment operation
and a concrete block manufacturing operation.

          Marketing
          The housing, construction and remodeling markets are the primary
markets for Pacific Lumber's lumber products.  Pacific Lumber's policy is
to maintain a wide distribution of its products both geographically and in
terms of the number of customers.  Pacific Lumber sells its lumber products
throughout the country to a variety of accounts, the large majority of
which are wholesalers, followed by retailers, industrial users, exporters
and manufacturers.  Upper grades of redwood and Douglas-fir lumber are sold
throughout the entire United States, as well as to export markets.  Common
grades of redwood lumber are sold principally west of the Mississippi
River, with California accounting for approximately 55% of these sales in
1998.  Common grades of Douglas-fir lumber are sold primarily in
California.  In 1998, Pacific Lumber had three customers which accounted
for approximately 8%, 7% and 7%, respectively, of Pacific Lumber's total
revenues.  Exports of lumber accounted for approximately 4% of Pacific
Lumber's total revenues in 1998.  Pacific Lumber markets its products
through its own sales staff which focuses primarily on domestic sales.

          Pacific Lumber actively follows trends in the housing,
construction and remodeling markets in order to maintain an appropriate
level of inventory and assortment of products.  Due to its high quality
products, competitive prices and long history, Pacific Lumber believes it
has a strong degree of customer loyalty.

          Competition
          Pacific Lumber's lumber is sold in highly competitive markets. 
Competition is generally based upon a combination of price, service,
product availability and product quality.  Pacific Lumber's products
compete not only with other wood products but with metals, masonry, plastic
and other construction materials made from non-renewable resources.  The
level of demand for Pacific Lumber's products is dependent on such broad
factors as overall economic conditions, interest rates and demographic
trends.  In addition, competitive considerations, such as total industry
production and competitors' pricing, as well as the price of other
construction products, affect the sales prices for Pacific Lumber's lumber
products.  Pacific Lumber currently enjoys a competitive advantage in the
upper grade redwood lumber market due to the quality of its timber holdings
and relatively low cost production operations.  Competition in the common
grade redwood and Douglas-fir lumber market is more intense, and Pacific
Lumber competes with numerous large and small lumber producers.

          Employees
          As of March 1, 1999, Pacific Lumber had approximately 1,250
employees, none of whom are covered by a collective bargaining agreement.

          Relationships with Scotia LLC and Britt
          Scotia LLC succeeded by merger to substantially all of the
business and operations of Pacific Lumber's wholly owned subsidiary, Scotia
Pacific Holding Company, a Delaware corporation ("SCOTIA PACIFIC"),
effective as of July 20, 1998 (the "CLOSING DATE").  Effective with the
Closing Date, Scotia LLC acquired Scotia Pacific's forestry department. 
Scotia LLC's foresters, wildlife and fisheries biologists, geologists and
other personnel are responsible for providing a number of forest
stewardship techniques, including protecting the timber located on the
Scotia LLC Timberlands from forest fires, erosion, insects and other
damage, overseeing reforestation activities and monitoring environmental
and regulatory compliance.  Scotia LLC's personnel are also responsible for
preparing THPs and updating the information contained in the GIS.  See "--
Harvesting Practices" above for a description of the GIS updating process
and the THP preparation process.

          Prior to consummation of the Offering, Scotia Pacific and Pacific
Lumber were party to several agreements between themselves, including a
Master Purchase Agreement, a Services Agreement, an Additional Services
Agreement, an Environmental Indemnification Agreement and a Reciprocal
Rights Agreement.  On the Closing Date, Scotia LLC entered into a New
Master Purchase Agreement with Pacific Lumber (the "NEW MASTER PURCHASE
AGREEMENT") which governs the sale to Pacific Lumber of logs harvested from
the Scotia LLC Timberlands.  As Pacific Lumber purchases logs from Scotia
LLC pursuant to the New Master Purchase Agreement, Pacific Lumber is
responsible, at its own expense, for harvesting and removing the standing
Scotia LLC Timber covered by approved THPs, and the purchase price is
therefore based upon "stumpage prices."  Title to, and the obligation to
pay for, harvested logs does not pass to Pacific Lumber until the logs are
transported to Pacific Lumber's log decks and measured.  The New Master
Purchase Agreement generally contemplates that all sales of logs by Scotia
LLC to Pacific Lumber will be at a price which equals or exceeds the
applicable SBE Price.  The New Master Purchase Agreement defines the "SBE
PRICE" for any species and category of timber as the stumpage price for
such species and category, as set forth in the most recent "Harvest Value
Schedule" (or any successor publication) published by the California State
Board of Equalization (or any successor agency) applicable to the timber
sold during the period covered by such Harvest Value Schedule.  Harvest
Value Schedules are published twice a year for purposes of computing a
yield tax imposed on timber harvested between January 1 through June 30 and
July 1 through December 31.  SBE Prices are not necessarily representative
of actual prices that would be realized from unrelated parties at
subsequent dates.

          After obtaining an approved THP, Scotia LLC offers for sale the
logs to be harvested pursuant to such THP. While Scotia LLC may sell logs
to third parties, it derives substantially all of its revenue from the sale
of logs to Pacific Lumber pursuant to the New Master Purchase Agreement. 
Each sale of logs by Scotia LLC to Pacific Lumber is made pursuant to a
separate log purchase agreement that relates to the Scotia LLC Timber
covered by an approved THP and incorporates the provisions of the New
Master Purchase Agreement.  Each such log purchase agreement provides for
the sale to Pacific Lumber of the logs harvested from the Scotia LLC Timber
covered by such THP and generally constitutes an exclusive agreement with
respect to the timber covered thereby, subject to certain limited
exceptions.  However, the timing and amount of log purchases by Pacific
Lumber will be affected by factors outside the control of Scotia LLC,
including regulatory and environmental factors, the financial condition of
Pacific Lumber, Pacific Lumber's own supply of timber and its ability to
harvest such timber, and the supply and demand for lumber products (which,
in turn, will be influenced by demand in the housing, construction and
remodeling industries).

          Scotia LLC continues to rely on Pacific Lumber to provide
operational, management and related services not performed by its own
employees with respect to the Scotia LLC Timberlands pursuant to a New
Services Agreement (the "NEW SERVICES AGREEMENT").  The services under the
New Services Agreement include the furnishing of all equipment, personnel
and expertise not within Scotia LLC's possession and reasonably necessary
for the operation and maintenance of the Scotia LLC Timberlands and the
Scotia LLC Timber as well as timber management techniques designed to
supplement the natural regeneration of, and increase the amount of, Scotia
LLC Timber.   Pacific Lumber is required to provide all services under the
New Services Agreement in a manner consistent in all material respects with
prudent business practices which, in the reasonable judgment of Pacific
Lumber (a) are consistent with then current applicable industry standards
and (b) are in compliance in all material respects with all applicable
timber laws.  As compensation for the services provided by Pacific Lumber
pursuant to the New Services Agreement, Scotia LLC pays Pacific Lumber a
services fee ("SERVICES FEE") which is adjusted each year based on a
specified government index relating to wood products and reimburses Pacific
Lumber for the cost of constructing, rehabilitating and maintaining roads,
and performing reforestation services, on the Scotia LLC Timberlands, as
determined in accordance with generally accepted accounting principles. 
Certain of such reimbursable expenses are expected to vary in relation to
the amount of timber to be harvested in any given period.

          On the Closing Date, Scotia LLC and Pacific Lumber also entered
into a New Additional Services Agreement (the "NEW ADDITIONAL SERVICES
AGREEMENT") pursuant to which Scotia LLC provides certain services to
Pacific Lumber.  Services include (a) assisting Pacific Lumber to operate,
maintain and harvest its own timber properties, (b) updating and providing
access to the GIS with respect to information concerning Pacific Lumber's
own timber properties and (c) assisting Pacific Lumber with its statutory
and regulatory compliance.  Pacific Lumber pays Scotia LLC a fee for such
services equal to the actual cost of providing such services, as determined
in accordance with generally accepted accounting principles.

          On the Closing Date, Scotia LLC, Pacific Lumber and Salmon Creek
also entered into a New Reciprocal Rights Agreement whereby, among other
things, the parties granted to each other certain reciprocal rights of
egress and ingress through their respective properties in connection with
the operation and maintenance of such properties and their respective
businesses.  In addition, on the Closing Date, Pacific Lumber entered into
a New Environmental Indemnification Agreement with Scotia LLC (the "NEW
ENVIRONMENTAL INDEMNIFICATION AGREEMENT"), pursuant to which Pacific Lumber
agreed to indemnify Scotia LLC from and against certain present and future
liabilities arising with respect to hazardous materials, hazardous
materials contamination or disposal sites, or under environmental laws with
respect to the Scotia LLC Timberlands.  In particular, Pacific Lumber is
liable with respect to any contamination which occurred on the Scotia LLC
Timberlands prior to the date of the agreement.

          Pacific Lumber entered into an agreement with Britt (the "BRITT
AGREEMENT") which governs the sale of logs by Pacific Lumber and Britt to
each other, the sale of hog fuel (wood residue) by Britt to Pacific Lumber
for use in Pacific Lumber's cogeneration plant, the sale of lumber by
Pacific Lumber and Britt to each other, and the provision by Pacific Lumber
of certain administrative services to Britt (including accounting,
purchasing, data processing, safety and human resources services).  The
logs which Pacific Lumber sells to Britt and which are used in Britt's
manufacturing operations are sold at approximately 75% of applicable SBE
prices (to reflect the lower quality of these logs).  Logs which either
Pacific Lumber or Britt purchases from third parties and which are then
sold to each other are transferred at the actual cost of such logs.  Hog
fuel is sold at applicable market prices, and administrative services are
provided by Pacific Lumber based on Pacific Lumber's actual costs and an
allocable share of Pacific Lumber's overhead expenses consistent with past
practice.

     BRITT LUMBER OPERATIONS

          Business
          Britt is located in Arcata, California, approximately 45 miles
north of Pacific Lumber's headquarters.  Britt's primary business is the
processing of small diameter redwood logs into wood fencing products for
sale to retail and wholesale customers.  Britt was incorporated in 1965 and
operated as an independent manufacturer of fence products until July 1990,
when it was purchased by a subsidiary of the Company.  Britt purchases
small diameter (6 to 11 inch) redwood logs of varying lengths.  Britt's
purchases are primarily from Pacific Lumber, although it does purchase a
variety of different diameter and different length logs from various other
timberland owners.  Britt processes logs at its mill into a variety of
different fencing products, including "dog-eared" 1" x 6" fence stock in
six foot lengths, 4" x 4" fence posts in 6 through 12 foot lengths, and
other lumber products in 6 through 12 foot lengths.  Britt's purchases of
logs from third parties are generally consummated pursuant to short-term
contracts of twelve months or less.

          Marketing
          In 1998, Britt sold approximately 86 million board feet of lumber
products to approximately 57 different customers.  Over one-half of its
1998 lumber sales were in California.  The remainder of its 1998 sales were
in ten other western states.  In 1998, Britt had four customers which
accounted for 23%, 20%, 12% and 11%, respectively, of Britt's total sales. 
Britt markets its products through its own salesmen to a variety of
customers, including distribution centers, industrial remanufacturers,
wholesalers and retailers.

          Britt's backlog of sales orders at December 31, 1998 and 1997 was
approximately $3.2 million and $5.4 million, respectively, the substantial
portion of which was delivered in the first quarter of the next fiscal
year.

          Facilities and Employees
          Britt's manufacturing operations are conducted on 12 acres of
land, 10 acres of which are leased on a long-term fixed-price basis from an
unrelated third party.  Production is conducted in a 46,000 square foot
mill.  An 18-acre log sorting and storage yard is located one quarter of a
mile away.  The mill was constructed in 1980, and capital expenditures to
enhance its output and efficiency are made periodically.  Britt's (single
shift) mill capacity, assuming 40 production hours per week, is estimated
at 37.4 million board feet of fencing products per year.  As of March 1,
1999, Britt employed approximately 130 people, none of whom are covered by
a collective bargaining agreement.

          Competition
          Management estimates that Britt accounted for approximately one-
third of the total redwood fence market in 1998.  Britt competes primarily
with the northern California mills of Georgia Pacific, Eel River and
Redwood Empire.

     REGULATORY AND ENVIRONMENTAL FACTORS AND HEADWATERS AGREEMENT

          This section contains statements which constitute "forward-
looking statements" within the meaning of the Private Securities Litigation
Reform Act of 1995.  See Item 1. "Business--General" in this section for
cautionary information with respect to such forward-looking statements.

          General
          Pacific Lumber's business is subject to a variety of California
and federal laws and regulations dealing with timber harvesting, threatened
and endangered species and habitat for such species, and air and water
quality.  Compliance with such laws and regulations plays a significant
role in Pacific Lumber's business.  The California Forest Practice Act (the
"FOREST PRACTICE ACT") and related regulations adopted by the California
Board of Forestry (the "BOF") set forth detailed requirements for the
conduct of timber harvesting operations in California.  These requirements
include the obligation of timber companies to prepare, and obtain
regulatory approval of, detailed THPs containing information with respect
to areas proposed to be harvested (see "--Pacific Lumber Operations--
Harvesting Practices" above).  As described further below, California law
also requires large timber companies submitting THPs to demonstrate that
their proposed timber operations will not decrease the sustainable
productivity of their timberlands, including through review and approval by
the CDF, an SYP establishing an LTSY for its timberlands.  The federal
Endangered Species Act (the "ESA") and California Endangered Species Act
(the "CESA") provide in general for the protection and conservation of
specifically listed wildlife species and plants which have been declared to
be endangered or threatened.  These laws generally prohibit certain adverse
impacts on such species (referred to as a "take"), except for incidental
takes pursuant to otherwise lawful activities which do not jeopardize the
continued existence of the affected species and which are made in
accordance with an approved HCP and related incidental take permit.   An
HCP, among other things, analyzes the potential impact of the incidental
take of species and specifies measures to monitor, minimize and mitigate
such impact.  The operations of Pacific Lumber are also subject to the
California Environmental Quality Act (the "CEQA"), which provides for
protection of the state's air and water quality and wildlife, and the
California Water Quality Act and Federal Clean Water Act, which require
that Pacific Lumber conduct its operations so as to reasonably protect the
water quality of nearby rivers and streams.

          Compliance with such laws, regulations and judicial and
administrative interpretations, together with other regulatory and
environmental matters, have resulted in restrictions on the geographic
scope and timing of Pacific Lumber's timber operations, increased
operational costs and engendered litigation and other challenges to Pacific
Lumber's operations.   The designation of a species as endangered or
threatened under the ESA or the CESA can significantly affect Pacific
Lumber's business if that species inhabits the Scotia LLC Timberlands.  The
northern spotted owl, the marbled murrelet and the coho salmon are species
the designation of which has the potential to significantly impact Pacific
Lumber's business.  In the absence of an approved HCP and incidental take
permits, Pacific Lumber has been required to operate on a "no-take" basis
with respect to these species.  Prior to 1998, these matters had not had a
significant adverse effect on Pacific Lumber's financial position, results
of operations or liquidity.  However, Pacific Lumber's 1998 results of
operations were adversely affected by certain regulatory and environmental
matters, including during the second half of 1998 the absence of a
sufficient number of available THPs to enable Pacific Lumber to conduct its
operations at historic levels.

          Consummation of the Headwaters Agreement
          In September 1996, Pacific Lumber and MAXXAM entered into the
Headwaters Agreement with the United States and California that provided
the framework for the acquisition by the United States and California of
the Headwaters Timberlands owned by the Companies.  A substantial portion
of the Headwaters Timberlands consists of virgin old growth timberlands.
Consummation of the Headwaters Agreement was conditioned upon, among other
things (i) federal and state funding, (ii) state approval of an SYP, (iii)
federal approval of an HCP  designed to monitor and mitigate the incidental
take of species in connection with harvesting operations, (iv) the issuance
of incidental take permits which allow for "incidental takes" of threatened
or endangered species which do not jeopardize their continued existence,
(v) acquisition of the Elk River Timberlands and (vi) tax closing
agreements satisfactory to MAXXAM and Pacific Lumber.

          In November 1997, President Clinton signed an appropriations bill
which authorized the expenditure of $250 million of federal funds toward
consummation of the Headwaters Agreement.  In July 1998, the Companies
released a draft multi-species habitat conservation plan ("MULTI-SPECIES
HCP") and draft SYP (the Multi-Species HCP, together with the SYP, the
"COMBINED PLAN") for the purpose of public review and comment.  The
Combined Plan provided for, among other things, certain measures designed
to protect habitat for the marbled murrelet, a coastal seabird, and the
northern spotted owl, and required a specified watershed analysis process
designed to result in site specific protective zones for fish and other
wildlife being established on Pacific Lumber's LLC Timberlands.  

          In September 1998, California Governor Wilson signed a bill (the
"CALIFORNIA HEADWATERS BILL") which, among other things, appropriated $130
million toward consummation of the Headwaters Agreement, and authorized the
expenditure of up to $80 million toward the acquisition at fair market
value of Scotia LLC's Owl Creek grove. The bill also provided that if any
portion of the $80 million remained after purchase of the Owl Creek grove,
it could be used to purchase certain other timberlands.  Other provisions
of the California Headwaters Bill authorized the expenditure of up to $20
million for the purchase of a portion of the Grizzly Creek grove, in which
the timber is owned by Pacific Lumber and the land is owned by Scotia LLC. 
The California Headwaters Bill also contained provisions requiring the
inclusion of additional environmentally focused provisions in the final
version of the Combined Plan, including establishing wider interim
streamside "no-cut" buffers (while the watershed analysis process referred
to below is being completed) than provided for in the Combined Plan,
imposing minimum and maximum "no-cut" buffers upon the completion of the
watershed analysis process and designating the Owl Creek grove as a marbled
murrelet conservation area.

          Beginning in December 1998, following the conclusion of the
public review and comment period, federal and state regulatory agencies
began to propose changes to the Combined Plan.  These proposals, together
with the California Headwaters Bill, sought to impose more stringent
restrictions and requirements, reducing the amount of timber that could be
harvested as compared to the amount contemplated by the Combined Plan.  As
a result, on December 17, 1998, Pacific Lumber announced that its
negotiations with the regulatory agencies regarding these proposed
revisions had not produced agreement on a Multi-Species HCP, as Pacific
Lumber and Scotia LLC could not agree to certain of the proposed revisions
and continue to operate effectively.  Negotiations continued through
December without the parties reaching an agreement, and on December 31,
1998, Pacific Lumber announced that it could not concur with the terms of
the then-current agency proposals until it had received a copy of the Final
HCP and Final SYP, and it could review and analyze the Final Plans.  On
January 22, 1999, the federal and state agencies published the Final Plans,
which included a revised Multi-Species HCP containing many of the
restrictions to which Pacific Lumber had previously objected and certain
other new restrictions not agreed to by Pacific Lumber and Scotia LLC.

          On February 16, 1999, Pacific Lumber and Scotia LLC filed with
the CDF certain information regarding the Final Plans and estimates of
sustained yield harvest and economic impacts based on various scenarios
giving effect to the new proposed restrictions (the "CDF FILING").  Pacific
Lumber stated in the CDF Filing that, based on its computer modeled
estimates, minimum average annual harvest levels of 210 million board feet
of softwoods during the first decade were needed in order to generate
income and cash flows to meet interest and capital expenditure obligations;
to provide a minimum basis upon which to plan, adjust budget and conduct
future operations so as to meet financial obligations and avoid additional
layoffs, mill closings and customer supply disruptions; and to satisfy its
other obligations to employees, customers and creditors.  On February 25,
1999, the CDF delivered a letter to Pacific Lumber that in effect
interpreted the Final HCP to limit Pacific Lumber's projected average
annual harvest levels during the first decade to approximately 137 million
board feet of softwoods.  On February 26, 1999, Pacific Lumber announced
that it could not proceed to consummate the Headwaters Agreement based on
these projected harvest levels and other factors.

          On March 1, 1999, the CDF delivered a superseding letter to
Pacific Lumber approving the Final SYP and stating that, based upon further
analysis and information, Pacific Lumber's projected base average annual
harvest level during the first decade, consistent with the Final HCP, could
be approximately 179 million board feet of softwoods (not including timber
harvestable from the additional timber property which Scotia LLC had
purchased since the issuance of the Timber Notes ("ADDITIONAL TIMBER
PROPERTY") or other potential increases in harvest level).  Further, on the
same date, the Company received written clarification from the federal and
state wildlife agencies that, among other things, the adaptive management
provision in the Final HCP would be implemented on a timely and efficient
basis, and in a manner that would be both biologically and economically
sound.  See "--The Final Plans."

          After consideration of all relevant factors, Pacific Lumber and
Scotia LLC consummated the transactions contemplated by the Headwaters
Agreement, and in consideration of the transfer of the Headwaters
Timberlands, the United States and California paid $300 million, of which
Salmon Creek received $299,850,000 (prior to payment of approximately
$125,000 of related closing costs) and Scotia LLC received $150,000, and
the United States and California transferred to Pacific Lumber
approximately 7,700 acres of the Elk River Timberlands.  California also
entered into agreements with Scotia LLC and Pacific Lumber to purchase the
Owl Creek grove and a portion of the Grizzly Creek grove, respectively. 
Further, in response to uncertainties regarding the potential impact of the
consummation of the Headwaters Agreement on the Timber Notes, Salmon Creek
deposited $285 million (representing all of its cash proceeds from the sale
of the Headwaters Timberlands, net of estimated costs associated with the
negotiation and consummation of the Headwaters Agreement), in an escrow
account to be made available, while so held, as necessary to support the
Timber Notes, and to be released only under certain circumstances.  See "--
Escrow Agreement."

          The Final Plans
          The Final Plans were also completed in connection with the
consummation of the Headwaters Agreement.  The Final HCP provides for the
issuance by state and federal regulatory agencies of the incidental take
permits ("PERMITS") with respect to certain threatened, endangered and
other species found on Pacific Lumber's timberlands over the 50 year term
of the Final HCP.  The Permits issued under the Final HCP allow incidental
takes of 17 different species covered by the Final HCP, including the coho
salmon, the marbled murrelet, the northern spotted owl and the steelhead
trout.  

          The Final HCP has modified certain provisions of the Combined
Plan proposed in July 1998 and includes other provisions contemplated by
the California Headwaters Bill.  Among other things, it no longer covers 19
of the species which were included in the Combined Plan.  The Final HCP
also increased the size of certain areas to be set aside as marbled
murrelet conservation areas, and adopted wider interim streamside "no cut"
buffers as contemplated by the California Headwaters Bill.  Pending
completion of the watershed analysis, the Final HCP also provides for "no
cut" buffers adjacent to certain intermittent watercourses on Pacific
Lumber's timberlands that flow only in response to significant
precipitation.  Pacific Lumber has not completed its analysis of the
location of all of the intermittent streams on its property.  The areas set
aside for streamside buffers may be adjusted up or down, subject to certain
minimum and maximum buffers, based upon the watershed analysis process,
which the Final HCP requires be completed within five years of its
effective date.  The watershed analysis will also be reassessed every five
years.  

          The Final HCP also imposes certain restrictions on the use of
roads on the timberlands covered by the Final HCP (the "COVERED LANDS")
during several months of the year and during periods of wet weather, except
for certain limited situations.  These restrictions may restrict operations
on the Covered Lands so that many harvesting activities could generally
only be carried out from June through October of any particular harvest
year, and then only if wet weather conditions do not exist.  However,
Pacific Lumber anticipates that some harvesting will be able to be
conducted during the other months.  The Final HCP also requires the
Companies to stormproof 75 miles of roads on the Covered Lands on an annual
basis, and also to build and repair certain roads.  The Final HCP requires
the stormproofing to be done between May 2 and October 14 of each year,
while the road building and repair is to be accomplished between June 2 and
October 14 of each year.  The road stormproofing, building and repair is
also required to be suspended if certain wet weather conditions exist.

          The Final HCP contains an adaptive management provision, which
various regulatory agencies have clarified will be implemented on a timely
and efficient basis, and in a manner which will be both biologically and
economically sound.  This provision allows the Companies to propose changes
that are consistent with the California Agreement (as defined below) to any
of the Final HCP prescriptions based on, among other things, certain
economic considerations.  The regulatory agencies have also clarified that
in applying this adaptive management provision, to the extent the changes
proposed by Pacific Lumber do not result in the jeopardy of a particular
species, the regulatory agencies will consider the practicality of the
suggested changes, including the cost to Pacific Lumber and economic
feasibility and viability.

          Implementing Agreements
          In connection with consummation of the Headwaters Agreement, the
Companies entered into several implementing agreements, including an
Implementation Agreement with Regard to Habitat Conservation Plan (the
"IMPLEMENTATION AGREEMENT") among the Companies and National Marine
Fisheries Service ("NMFS"), U.S. Fish and Wildlife Service ("USFWS"),
California Department of Fish and Game ("CDFG") and the CDF (the
"AGENCIES") to effectuate the Final HCP.  Pursuant to the Implementation
Agreement, NMFS, USFWS and CDFG found that the Final HCP met all applicable
regulatory requirements and authorized the issuance of the Permits.  Each
new THP on the Covered Lands to be submitted by Pacific Lumber or Scotia
LLC is required to incorporate the provisions of the Final HCP.  Timber
harvesting and certain other specified activities detrimental to the
marbled murrelet are prohibited for the life of the Permits in all of the
marbled murrelet conservation areas.  Such activities are prohibited in the
Grizzly Creek grove for an initial five-year period to allow an opportunity
for a portion of the grove to be purchased.  Timber harvesting and certain
other specified activities may take place in the Grizzly Creek grove after
the initial five-year period unless USFWS or CDFG, in conjunction with
analysis from a scientific panel, make certain determinations under the ESA
and CESA regarding the effect on the marbled murrelet of these activities. 
If USFWS or CDFG make such a determination, the Grizzly Creek grove is
required to be managed as a marbled murrelet conservation area.

          Under the Implementation Agreement, the Companies are required to
expend such funds as may be necessary to fulfill each of their obligations
under the Final HCP and to post $2 million security to help secure certain
of their obligations under the Final HCP, which amount is subject to an
annual inflation index and is increased by the amount of any liquidated
damages the Companies are required to pay to California in the prior year
pursuant to the California Agreement.  The Companies are also required to
fund an independent third party to monitor compliance with the Final HCP.

          The Implementation Agreement permits the Companies to add up to
25,000 acres to the Final HCP so long as various conditions are satisfied,
including that the acreage to be added must be situated within one mile of
the main contiguous portion of the Covered Lands, which are defined in the
Implementation Agreement generally to include all timberlands owned by the
Companies on the date of the Implementation Agreement.  The Implementation
Agreement provides that the Companies may relinquish the Permits; provided
that in the event of a relinquishment or revocation of the Permits, the
Companies must fully mitigate for the take of species that has occurred
prior to the relinquishment or revocation.  The extent of the full
mitigation that would be required depends on a variety of circumstances. 
If it is determined that the Companies must so mitigate for the prior take
of species, the Companies are required to execute a binding covenant
running with the land, in form and content satisfactory to the Agencies,
setting forth such commitment.

          The Companies also entered into a separate agreement regarding
enforcement of the California Headwaters Bill (the "CALIFORNIA AGREEMENT")
with the California Resources Agency, CDFG, the CDF and the California
Wildlife Conservation Board ("CWCB").  The California Agreement, among
other things, provides that the Companies shall not undertake any timber
harvesting detrimental to the marbled murrelet in conservation areas
totaling approximately 7,700 acres for 50 years from the effective date of
the California Agreement.  Pursuant to the requirements of the California
Agreement, the terms and conditions of the California Agreement were
recorded at closing as terms and conditions against the Covered Lands, to
bind the Company and its successors and assigns for a term of 50 years. The
California Agreement further provides for various remedies in the event of
a breach of the agreement, the Final HCP, the Implementation Agreement, the
California Permit, the California Headwaters Bill or any THP, including the
issuance of written stop orders with respect to specified harmful
activities, and liquidated damages for various breaches.

          The California Agreement also provides that the Companies are
liable to the state for the reasonable costs of mitigation or similar work
performed by California as a "self-help" remedy in certain circumstances. 
The Companies are also required to reimburse California for monitoring for
compliance with the agreement and to allow for inspection of timber
harvesting activities. The Companies are also required to post $2 million
security under the California Agreement (which is the same $2 million
required, as described above, under the Implementation Agreement).  The
California Agreement also provides that it may not be amended unless, among
other things, certain California academic officials and a panel of
scientists have found the proposed amendment to be consistent with the ESA,
the Final HCP and the California Headwaters Bill.  

          Owl Creek and Grizzly Creek Agreements
          The California Headwaters Bill appropriated up to $80 million
toward the purchase of the Owl Creek grove and up to an additional $20
million toward the purchase of a portion (as specified by California) of
the Grizzly Creek grove.  In connection with the consummation of the
Headwaters Agreement, California entered into agreements with respect to
the future purchase of the Owl Creek grove (the "OWL CREEK AGREEMENT") and
a portion of the Grizzly Creek grove (the "GRIZZLY CREEK AGREEMENT").

          Under the Owl Creek Agreement, Scotia LLC agreed to sell the Owl
Creek grove to the state of California for consideration consisting of the
lesser of the appraised fair market value or $79.65 million. The state may
pay the consideration for the Owl Creek grove to Scotia LLC in cash or, at
the state's option, 25% in cash and the balance in three equal annual
installments without interest.  Should Scotia LLC disagree with the
methodology of the appraisal or its application, or if the fair market
value determined under the appraisal is less than $79.65 million, Scotia
LLC would have the right to terminate the Owl Creek Agreement. California
must purchase the Owl Creek grove by the later of the state's fiscal year
immediately following the fiscal year in which the state purchases the
Grizzly Creek property, or June 30, 2001.  Consummation of the purchase
transaction under the Owl Creek Agreement is also subject to typical real
estate  title and other closing conditions.   The California Headwaters
Bill provides that the appraisal methodology, at the Scotia LLC's option,
may assume the issuance of various permits and approvals with respect to
the Owl Creek grove, including the Permits.

          With respect to the potential future Grizzly Creek sale, Pacific
Lumber and the CWCB agreed that Pacific Lumber would transfer a portion of
the Grizzly Creek grove to the state of California at a purchase price not
to exceed $19.85 million.  Pacific Lumber has furnished a list of licensed
appraisers to California, and the state is to select an appraiser from this
list to determine the fair market value of the property, with Pacific
Lumber having the right to terminate the agreement if it reasonably
disagrees with the methodology employed with respect to the appraisal or in
the application of such methodology.  The Grizzly Creek Agreement provides
that California must purchase a portion of the Grizzly Creek grove by no
later than October 31, 2000.  Consummation of the purchase transaction
under the Grizzly Creek Agreement is also subject to typical real estate
title and other closing conditions.  Also pursuant to the terms of the
Grizzly Creek Agreement, Pacific Lumber granted the state of California a
five-year option to purchase, at fair market value, additional property
within the Grizzly Creek grove.  The net proceeds of the sale of the
Grizzly Creek property will be placed in escrow (on the same basis as the
net proceeds of the sale of the Headwaters Timberlands) unless, at the time
of receipt of such proceeds, funds are no longer on deposit under the
Escrow Agreement.  See "--Escrow Agreement and Item 7.  "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Financial Condition and Investing and Financing Activities."

          Water Quality
          Under the Federal Clean Water Act, the Environmental Protection
Agency (the "EPA") is required to establish total maximum daily load limits
("TMDLS") in water courses that have been declared to be "water quality
impaired."  The EPA and the North Coast Regional Water Quality Control
Board ("NCRWQCB") are in the process of establishing TMDL limits for
seventeen northern California rivers and certain of their tributaries,
including certain water courses that flow within the Scotia LLC
Timberlands.  As part of this process, the EPA and the NCRWQCB are expected
to submit the TMDL requirements on the Scotia LLC Timberlands for public
review and comment.  Following the comment period, the NCRWQCB would
finalize the TMDL requirements applicable to the Scotia LLC Timberlands,
which may require aquatic measures that are different from or in addition
to the prescriptions to be developed pursuant to the watershed analysis
process contained in the Final HCP.

          Impact of Future Legislation
          Laws, regulations and related judicial decisions and
administrative interpretations dealing with Pacific Lumber's business are
subject to change and new laws and regulations are frequently introduced
concerning the California timber industry.  From time to time, bills are
introduced in the California legislature and the U.S. Congress which relate
to the business of Pacific Lumber, including the protection and acquisition
of old growth and other timberlands, threatened and endangered species,
environmental protection, air and water quality and the restriction,
regulation and administration of timber harvesting practices.  In addition
to existing and possible new or modified statutory enactments, regulatory
requirements and administrative and legal actions, the California timber
industry remains subject to potential California or local ballot
initiatives and evolving federal and California case law which could affect
timber harvesting practices.  It is not possible to assess the effect of
such future legislative, judicial and administrative events on Pacific
Lumber or its business.

          Timber Operator's License
          On February 26, 1999, the CDF issued Pacific Lumber a conditional
TOL for calendar year 1999. The 1999 TOL requires, among other things, that
harvesting under approved THPs by Pacific Lumber, Scotia LLC and their
contractors will be governed by limitations that require non-emergency road
use activities to cease under certain wet weather conditions.   See Item 3. 
"Legal Proceedings--Timber Operator's License."

          Escrow Agreement
          As a result of the sale of the Headwaters Timberlands, Salmon
Creek received proceeds of $299,850,000 in cash, prior to payment of
closing costs and expenses.  Pursuant to an Escrow Agreement entered into
among Salmon Creek, Pacific Lumber and Citibank, N.A. (the "ESCROW AGENT"),
Salmon Creek has deposited approximately $285 million of such proceeds into
a restricted account (the "ESCROWED FUNDS"), which Escrowed Funds will be
made available, while so held in escrow, as necessary to support the Timber
Notes with the balance of approximately $15 million to be retained to
defray expenses in connection with negotiation and consummation of the
Headwaters Agreement.  In the event that the expenses in connection with
the negotiation and consummation of the Headwaters Agreement are less than
$15 million, the remaining unused portion of the $15 million estimated
expense amount is to be added to the Escrowed Funds.  The net proceeds of
the sale of a portion of the Grizzly Creek grove will also be placed in
escrow (on the same basis as the net proceeds of the sale of the Headwaters
Timberlands) unless, at the time of receipt of such proceeds, funds are no
longer on deposit under the Escrow Agreement.  See Item 7.  "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Financial Condition and Investing and Financing Activities" for information
regarding the circumstances under which the Escrowed Funds can be released. 

ALUMINUM OPERATIONS

          This section contains statements which constitute "forward-
looking statements" within the meaning of the Private Securities Litigation
Reform Act of 1995.  See Item 1. "Business--General" for cautionary
information with respect to such forward-looking statements.

     GENERAL

          The Company owns 27,938,250 shares of the common stock of Kaiser,
representing a 35.3% interest in Kaiser.  Kaiser operates in all principal
aspects of the aluminum industry through its wholly owned subsidiary,
Kaiser Aluminum & Chemical Corporation ("KACC")--the mining of bauxite, the
refining of bauxite into alumina, the production of primary aluminum from
alumina, and the manufacture of fabricated (including semi-fabricated)
aluminum products. In addition to the production utilized by Kaiser in its
operations, Kaiser sells significant amounts of alumina and primary
aluminum in domestic and international markets.  The following table sets
forth total shipments and intersegment transfers of Kaiser's alumina,
primary aluminum, and fabricated aluminum operations:

<TABLE>
<CAPTION>


                                                      YEARS ENDED DECEMBER 31,         
                                             ----------------------------------------
                                                  1998          1997          1996     
                                             ------------  ------------  ------------
                                                     (IN THOUSANDS OF TONS(1))
<S>                                          <C>           <C>           <C>
Alumina:
          Shipments to Third Parties              2,250.0       1,929.8       2,073.7 
          Intersegment Transfers                    750.7         968.0         912.4 
Primary Aluminum:                                           
          Shipments to Third Parties                263.2         327.9         355.6 
          Intersegment Transfers                    162.8         164.2         128.3 
Flat-Rolled Products:                         
          Shipments to Third Parties                235.6         247.9         204.8 
Engineered Products:                                                      
          Shipments to Third Parties                169.4         152.1         122.3 


<FN>

- ---------------
(1)  Tons in this section of this Report refer to metric tons of 2,204.6
     pounds.

</TABLE>

     SENSITIVITY TO PRICES AND HEDGING PROGRAMS

          Kaiser's earnings are sensitive to changes in the prices of
alumina, primary aluminum and fabricated aluminum products, and also depend
to a significant degree upon the volume and mix of all products sold and on
Kaiser's hedging strategies.  Primary aluminum prices have historically
been subject to significant cyclical price fluctuations.  Alumina prices,
as well as fabricated aluminum product prices (which vary considerably
among products), are significantly influenced by changes in the price of
primary aluminum, and generally lag behind primary aluminum prices.  Since
1993, the Average Midwest United States transaction price (the "AMT PRICE")
for primary aluminum has ranged from approximately $.50 to $1.00 per pound. 
During 1998, the AMT Price per pound of primary aluminum declined during
the year, beginning the year in the $.70 to $.75 range and ending the year
in the low $.60 range.  Subsequent to 1998, the AMT Price continued to
decline, and at February 26, 1999, the AMT Price was approximately $.58 per
pound. Alumina prices as well as fabricated aluminum product prices (which
vary considerably among products) are significantly influenced by changes
in the price of primary aluminum and generally lag behind primary aluminum
prices.  From time to time in the ordinary course of business Kaiser enters
into hedging transactions to provide price risk management in respect of
its net exposure resulting from (i) anticipated sales of alumina, primary
aluminum, and fabricated aluminum products, less (ii) expected purchases of
certain items, such as aluminum scrap, rolling ingot, and bauxite, whose
prices fluctuate with the price of primary aluminum.  Forward sales
contracts are used by Kaiser to effectively lock-in or fix the price that
KACC will receive for its shipments.  Kaiser also uses option contracts (i)
to establish a minimum price for its product shipments, (ii) to establish a
"collar" or range of prices for its anticipated sales, and/or (iii) to
permit Kaiser to realize possible upside price movements.  See Item 7A. 
"Quantitative and Qualitative Disclosures About Market Risk."

     PRODUCTION OPERATIONS

          Kaiser's operations are conducted through KACC's decentralized
business units which compete throughout the aluminum industry.  The alumina
business unit mines bauxite and obtains additional bauxite tonnage under
long-term contracts.  The primary aluminum products business unit operates
two wholly owned domestic smelters and two foreign smelters in which Kaiser
holds significant ownership interests.  Fabricated aluminum products are
manufactured by two business units--flat-rolled products and engineered
products.  These products are manufactured at plants located in principal
marketing areas of the United States and Canada.  The aluminum utilized in
Kaiser's fabricated products operations is comprised of primary aluminum,
obtained both internally and from third parties, and scrap metal purchased
from third parties.

          Bauxite and Alumina
          The following table lists Kaiser's bauxite mining and alumina
refining facilities as of December 31, 1998: 


<TABLE>
<CAPTION>

                                                                      ANNUAL
                                                                    PRODUCTION      TOTAL
                                                                     CAPACITY       ANNUAL
                                                       COMPANY     AVAILABLE TO   PRODUCTION
        ACTIVITY           FACILITY      LOCATION     OWNERSHIP    THE COMPANY     CAPACITY
- ----------------------  ------------  ------------  ------------  ------------  ------------
                                                                      (THOUSANDS OF TONS)
<S>                     <C>           <C>           <C>           <C>           <C>
Bauxite Mining          KJBC(1)       Jamaica            49.0%         4,500.0       4,500.0 
                        Alpart(2)     Jamaica            65.0%         2,275.0       3,500.0 
                                                                  ------------  ------------
                                                                       6,775.0       8,000.0 
                                                                  ============  ============

Alumina Refining        Gramercy      Louisiana         100.0%         1,050.0       1,050.0 
                        Alpart        Jamaica            65.0%           942.5       1,450.0 
                        QAL(3)        Australia          28.3%         1,033.0       3,650.0 
                                                                  ------------  ------------
                                                                       3,025.5       6,150.0 
                                                                  ============  ============

<FN>

- ---------------
(1)  Although Kaiser owns 49% of Kaiser Jamaica Bauxite Company ("KJBC"),
     it has the right to receive all of such entity's output.
(2)  Alumina Partners of Jamaica ("ALPART") bauxite is refined into alumina
     at the Alpart refinery.
(3)  Queensland Alumina Limited ("QAL").

</TABLE>

          Primary Aluminum Products
          The following table lists Kaiser's primary aluminum smelting
Facilities as of December 31, 1998:

<TABLE>
<CAPTION>


                                                            ANNUAL 
                                                             RATED         TOTAL
                                                            CAPACITY       ANNUAL         1998
                                              COMPANY     AVAILABLE TO     RATED       OPERATING
          LOCATION              FACILITY     OWNERSHIP    THE COMPANY     CAPACITY        RATE     
- ---------------------------  ------------  ------------  ------------  ------------  ------------
                                                             (THOUSANDS OF TONS)
<S>                          <C>           <C>           <C>           <C>           <C>
Domestic
          Washington         Mead                100%           200.0         200.0        103%   
          Washington         Tacoma              100%            73.0          73.0         94%   
                                                         ------------  ------------
               Subtotal                                         273.0         273.0 
                                                         ------------  ------------
International                                                                       
          Ghana              Valco(1)             90%           180.0         200.0         25%   
          Wales, United      Anglesey(2)          49%            66.2         135.0        120%   
               Kingdom                                   ------------  ------------
               Subtotal                                         246.2         335.0 
                                                         ------------  ------------

               Total                                            519.2         608.0 
                                                         ============  ============


<FN>

- ------------------------------
(1)  Valco Aluminium Company Limited ("Valco")
(2)  Anglesey Aluminium Limited ("Anglesey")

</TABLE>

          Fabricated Aluminum Products
          Kaiser manufactures and markets fabricated aluminum products for
the transportation, packaging, construction and consumer durables markets
in the United States and abroad.

          Flat-rolled Products.  The flat-rolled product business unit
operates the Trentwood, Washington, rolling mill and the Micromill facility
near Reno, Nevada.  The Trentwood facility accounted for approximately 58%
of Kaiser's 1998 fabricated aluminum products shipments.  The business unit
supplies the aerospace and general engineering markets (producing heat-
treat products), the beverage container market (producing body, lid and tab
stock) and the specialty coil markets (producing automotive brazing sheet,
wheel, and tread products), both directly and through distributors.

          Engineered Products.  The engineered products business unit is
headquartered in Southfield, Michigan and operates soft-alloy extrusion
facilities in Los Angeles, California; Santa Fe Springs, California;
Sherman, Texas; Richmond, Virginia; and London, Ontario, Canada; a cathodic
protection business located in Tulsa, Oklahoma, that also extrudes both
aluminum and magnesium; rod and bar extrusion facilities in Newark, Ohio,
and Jackson, Tennessee, which produce screw machine stock, redraw rod,
forging stock, and billet; and a facility in Richland, Washington, which
produces seamless tubing in both hard and soft alloys for the automotive,
other transportation, export, recreation, agriculture and other industrial
markets.

          The engineered products business unit also operates forging
facilities at Oxnard, California and Greenwood, South Carolina; a machine
shop at Greenwood, South Carolina; and a casting facility in Canton, Ohio. 
Kaiser has agreed to sell the Canton, Ohio plant and has signed a letter of
intent to sell to its partner its 50% interest in AKW L.P., a partnership
which designs, manufactures and sells heavy-duty aluminum truck wheels. 
The engineered components business unit is one of the largest producers of
aluminum forgings in the United States and is a major supplier of
high-quality forged parts to customers in the automotive, commercial
vehicle and ordnance markets.

     COMPETITION

          Aluminum competes in many markets with steel, copper, glass,
plastic and other materials.  In recent years, plastic containers have
increased and glass containers have decreased their respective shares of
the soft drink sector of the beverage container market.  In the United
States, beverage container materials, including aluminum, face increased
competition from plastics as increased polyethylene terephthalate ("PET")
container capacity is brought on line by plastics manufacturers.  Within
the aluminum business, Kaiser competes with both domestic and foreign
producers of bauxite, alumina and primary aluminum, and with domestic and
foreign fabricators.  Primary aluminum and, to some degree, alumina are
commodities with generally standard qualities, and competition in the sale
of these commodities is based primarily upon price, quality and
availability.  Kaiser also competes with a wide range of domestic and
international fabricators in the sale of fabricated aluminum products. 
Competition in the sale of fabricated products is based upon quality,
availability, price and service, including delivery performance.

     ENVIRONMENTAL AND ASBESTOS CONTINGENCIES

          Kaiser and KACC are subject to a number of environmental laws, to
fines or penalties assessed for alleged breaches of the environmental laws
and regulations, and to claims and litigation based upon such laws.  Based
on Kaiser's evaluation of these and other environmental matters, Kaiser has
established environmental accruals primarily related to potential solid
waste disposal and soil and groundwater remediation matters.   KACC is also
a defendant in a number of lawsuits in which the plaintiffs allege that
certain of their injuries were caused by, among other things, exposure to
asbestos during, and as a result of, their employment or association with
KACC or exposure to products containing asbestos produced or sold by KACC. 
See Note 8 to Kaiser's Consolidated Financial Statements (Exhibit 99.3
hereto) for further information.

     LABOR MATTERS

          Substantially all of KACC's hourly workforce at the Gramercy,
Louisiana, alumina refinery, Mead and Tacoma, Washington, aluminum
smelters, Trentwood, Washington, rolling mill, and Newark, Ohio, extrusion
facility were covered by a master labor agreement with the United
Steelworkers of America ("USWA") which expired on September 30, 1998.  The
parties did not reach an agreement prior to the expiration of the master
agreement and the USWA chose to strike.  In January 1999, Kaiser declined
an offer by the USWA to have the striking workers return to work at the
five plants without a new agreement.  Kaiser imposed a lock-out to support
its bargaining position and continues to operate the plants with salaried
employees and other workers as it has since the strike began.  Based on
operating results to date, Kaiser believes that a significant business
interruption will not occur.

          While Kaiser initially experienced an adverse strike-related
impact on its profitability in the fourth quarter of 1998, Kaiser believes
that KACC's operations at the affected facilities have been substantially
stabilized and will be able to run at, or near, full capacity, and that the
incremental costs associated with operating the affected plants during the
dispute were eliminated or substantially reduced as of January 1999
(excluding the impacts of restart costs of certain potlines at the Mead and
Tacoma smelters and the effect of market factors such as a continued
market-related curtailment at the Tacoma smelter).  However, no assurances
can be given that KACC's efforts to run the plants on a sustained basis,
without a significant business interruption or material adverse impact on
Kaiser's operating results, will be successful.

     MISCELLANEOUS

          For further information concerning the business and financial
condition of Kaiser, see Kaiser's Consolidated Financial Statements and the
notes thereto (Exhibit 99.3 hereto), as well as Kaiser's Annual Report on
Form 10-K for the fiscal year ended December 31, 1998.  Such Exhibit and
Form 10-K are available at no charge by writing to the following address:
Kaiser Aluminum Corporation, Shareholder Services Department, 5847 San
Felipe, Suite 2600, Houston, Texas 77057.


ITEM 2.        PROPERTIES

          A description of the Company's properties is included under Item
1 above.


ITEM 3.        LEGAL PROCEEDINGS

          This section contains statements which constitute "forward-
looking statements" within the meaning of the Private Securities Litigation
Reform Act of 1995.  See Item 1. "Business--General" for cautionary
information with respect to such forward-looking statements.

TIMBER HARVESTING LITIGATION

          On August 12, 1998, an action entitled Environmental Protection
Information Center, Inc., Sierra Club v. Pacific Lumber, Scotia Pacific
Holding Company, Salmon Creek Corporation (No. C 98-3129) (the "EPIC
LAWSUIT") was filed in the United States District Court for the Northern
District of California.  The action relates to a number of Scotia LLC's
THPs.  The plaintiffs allege that certain procedural violations of the ESA
have resulted from logging activities on the Scotia LLC Timberlands and
seek to prevent the defendants from carrying out any harvesting activities
until certain wildlife consultation requirements under the ESA are
satisfied in connection with the Combined Plan.  See Item 1. "Business 
Regulatory and Environmental Matters and Headwaters Agreement."  On
September 3, 1998, the Court granted plaintiffs' motion for preliminary
injunction covering three THPs (consisting principally of old growth
Douglas-fir timber) pending evidentiary hearings.  Following the
evidentiary hearings, which concluded on October 22, 1998, the Court
requested additional briefing, which was filed on November 9, 1998.  On
March 15, 1999, the Court affirmed its preliminary injunction until it
reaches a decision on the merits of the EPIC Lawsuit.  However, subsequent
to this ruling, the Court heard the defendants' motion for summary judgment
on the merits of the case, and issued an order for plaintiffs to show cause
why the lawsuit should not be dismissed as moot since the consultation
requirement appears to have been concluded.  While the Company believes
that the consummation of the Headwaters Agreement is a positive development
with respect to the EPIC Lawsuit, the Company is unable to predict the
outcome of this case or its ultimate impact on the Company's consolidated
financial condition or results of operations.

          On January 26, 1998, an action entitled Coho Salmon,
Environmental Information Center, Inc., Sierra Club v. Pacific Lumber,
Scotia Pacific Holding Company and Salmon Creek Corporation (No. C 98-0283)
(the "COHO LAWSUIT") was filed in the United States District Court for the
Northern District of California.  This action alleged, among other things,
violations of the ESA and claims that defendants' logging operations in
five watersheds have contributed to the "take" of the coho salmon.  On
March 22, 1999, the Court approved the agreed dismissal with prejudice of
this lawsuit.

          On May 27, 1998, an action entitled Mateel Environmental Justice
Foundation v. Pacific Lumber, Scotia Pacific Holding Company, Salmon Creek
Corporation, MAXXAM Group Inc. (No. DR 980301) was brought and is now
pending in the Superior Court of Humboldt County.  This action alleges,
among other things, violations of California's unfair competition law of
the business and professions code based on citations and violations
(primarily water quality related) issued against the defendants since 1994
in connection with a substantial number of THPs.  On January 5, 1999,
plaintiff amended its complaint and narrowed its claim to 17 THPs. The
plaintiff seeks, among other things, disgorgement of profits and an
injunction prohibiting alleged unlawful actions and requiring corrective
action.  The Company does not believe that this matter will have a material
adverse effect upon its business or its consolidated financial condition or
results of operations.

          On December 2, 1997, a lawsuit entitled Kristi Wrigley, et al. v.
Charles Hurwitz, John Campbell, Pacific Lumber, MAXXAM Group Holdings Inc.,
Scotia Pacific Holding Company, MAXXAM Group Inc., MAXXAM Inc., Scotia
Pacific Company LLC and Federated Development Company (No. 9700399) (the
"WRIGLEY LAWSUIT") was filed in the Superior  Court of Humboldt County. 
This action has been consolidated with an action entitled Jennie Rollins,
et al. v. Charles Hurwitz, John Campbell, Pacific Lumber, MAXXAM Group
Holdings Inc., Scotia Pacific Holding Company, MAXXAM Group Inc., MAXXAM
Inc., Burnum Timber Company (No. 9700400) (the "ROLLINS LAWSUIT") which was
also filed on December 2, 1997 in the Superior Court of Humboldt County. 
These actions allege, among other things, that defendants' logging
practices have damaged the plaintiffs' properties and property values by
contributing to the destruction of certain watersheds and other areas,
including the Elk River watershed and the Stafford area, and have also
contributed to landslides in these areas.  Plaintiffs further allege that
in order to have THPs approved in connection with these areas, the
defendants submitted false information to the CDF in violation of the
California Business and Professions Code and the Racketeering Influence and
Corrupt Practices Act ("RICO").  The plaintiffs have amended their
complaints by alleging that the number of THPs involved in the lawsuit was
343 (an increase from the 150 in the original complaints).  Plaintiffs
seek unspecified damages and other relief.  The Company is unable to predict
the outcome of this case or the ultimate impact this matter will have on its
consolidated financial position, results of operations or liquidity.

          Scotia LLC is also subject to certain other pending THP cases
which would not be expected to have a material adverse effect upon the
Company; however, due to the diminished supply of THPs currently held by
Scotia LLC, the issuance of injunctive or similar relief in certain of
these cases could exacerbate the difficulties that Scotia LLC has been
experiencing with respect to the conduct of normal harvesting operations.

          On or about January 29, 1999, Pacific Lumber received a letter
from two private environmental advocacy groups of their 60-day notice of
intent to sue Scotia LLC, Pacific Lumber, several of the federal and state
agencies and others under the ESA.  The letter alleges various violations
of the ESA, and challenges, among other things, the validity and legality
of the Permits issued in conjunction with the Final Plans.  The Company
does not know when or if a lawsuit will be filed by the groups regarding
these matters, or if a lawsuit is filed, the ultimate impact of such
lawsuit on the Final Plans or the Company's consolidated financial
condition or results of operations.

TIMBER OPERATOR'S LICENSE

          Historically, Pacific Lumber has conducted logging operations on
the Scotia LLC Timberlands with its own staff of logging personnel as well
as through contract loggers.  In order to conduct logging operations in
California, a logging company must obtain from the CDF a timber operator's
license ("TOL"), which license is subject to annual renewal.  On December
30, 1997, the CDF issued a statement of issues in connection with an
administrative action entitled In the Matter of the Statement of Issues
Against: the Pacific Lumber Company, Timber Operator License A-5326 (No. LT
97-8).  This administrative action sought to deny Pacific Lumber's
application for a 1998 TOL based on various violations of the rules and
regulations of the Forest Practice Act.  On the same date, Pacific Lumber
entered into a stipulation with the CDF (the "STIPULATION") and received a
conditional TOL for 1998 ("1998 TOL").  The 1998 TOL and Stipulation were
conditioned on, among other things, Pacific Lumber complying with existing
requirements governing timber harvesting, wet weather operating
restrictions and additional inspection and self-monitoring obligations. 
Compliance with the obligations set forth in the Stipulation restricted
Pacific Lumber's ability to harvest timber and transport logs during
periods of wet weather and impaired Pacific Lumber's ability to maintain
adequate log inventories during those periods.  See Item 7.  "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Results of Operations--Operating Results."

          In June 1998, an audit inspection performed by the CDF to
evaluate forest practice violations found that Pacific Lumber was not in
violation of the Stipulation.  However, due to violations found or alleged
by the CDF after its June 1998 inspection, the CDF notified Pacific Lumber
on November 9, 1998 that it had suspended Pacific Lumber's TOL for the
remainder of 1998.  As a result, Pacific Lumber ceased all operations under
its 1998 TOL, and engaged independent contractors to complete harvesting
activities on all of the THPs that Pacific Lumber was operating at the time
of the notification (independent contractors historically account for
approximately 60% of the harvesting activities on Pacific Lumber's
timberlands).  Pacific Lumber determined not to appeal the suspension of
its 1998 TOL, and applied for a new TOL from the CDF for 1999.  On December
15, 1998, the CDF denied Pacific Lumber's application for a TOL for 1999.

          On February 26, 1999, the CDF issued Pacific Lumber a conditional
TOL for calendar year 1999.  The 1999 TOL requires, among other things,
that harvesting under approved THPs by Pacific Lumber, Scotia LLC and their
contractors will be governed by limitations that require non-emergency road
use activities to cease under certain wet weather conditions.  These road
use restrictions are substantially similar to those applicable under the
Final Plans and the 1998 TOL.  The 1999 TOL also provides that Pacific
Lumber shall enhance its compliance program by, among other things,
providing training for its logging personnel, increasing the size of its
compliance team and retaining an outside consulting firm to audit its
compliance procedures and make recommendations for improvement.  Pacific
Lumber has completed most of these items.  The 1999 TOL, among other
things, also contains a requirement that Pacific Lumber pay a conservation
organization designated by the CDF three times the value of any timber
felled by Pacific Lumber or any other licensed timber operator in any no-
cut zone on Pacific Lumber's timberlands.  The 1999 TOL also advises
Pacific Lumber that should the 1999 TOL be revoked, the issuance of a new
conditional license, absent compelling circumstances, would be unlikely. 
Pacific Lumber does not believe that the restrictions imposed by the 1999
TOL will have a material adverse effect on its, or the Company's, business
or financial performance.

          In addition to revocation of Pacific Lumber's TOL, other remedies
could be sought against Pacific Lumber and Scotia Pacific in connection
with violations of the Forest Practice Act.  In the past, fines and
probation have been imposed on Pacific Lumber in connection with similar
violations of the Forest Practices Act.

TAKINGS LITIGATION

          In May 1996, Scotia Pacific, Pacific Lumber and Salmon Creek
filed a lawsuit entitled The Pacific Lumber Company, et al. v. The United
States of America (No. 96-257L) in the United States Court of Federal
Claims seeking constitutional "just compensation" damages for the taking of
certain of their timberlands by the federal government through application
of the ESA.  Salmon Creek filed a similar action entitled Salmon Creek
Corporation v. California State Board of Forestry, et. al. (No. 96CS01057)
in the Superior Court of Sacramento County.  These actions were dismissed
with prejudice as a condition of and upon consummation of the Headwaters
Agreement.

HUNSAKER MATTER

          On November 24, 1998, an action entitled William Hunsaker, et al.
v. Charles E. Hurwitz, Pacific Lumber, MAXXAM Group Inc., MXM Corp.,
Federated Development Company and Does I-50 (No. C 98-4515) was filed in
the United States District Court for the Northern District of California. 
This action alleges, among other things, that a class consisting of the
vested employees and retirees of the former Pacific Lumber Company (Maine)
("OLD PALCO") is entitled to recover approximately $60 million of surplus
funds allegedly obtained through deceit and fraudulent acts from the Old
Palco retirement plan that was terminated in 1986 following acquisition by
MAXXAM Inc. of Pacific Lumber.  Plaintiffs further allege that defendants
violated RICO and engaged in numerous acts of unfair business practices in
violation of the California Business and Professions Code.  In addition to
seeking the surplus funds, plaintiffs also seek, among other things, a
constructive trust on the assets traceable from the surplus funds, plus
interest, trebling of damages for violation of RICO, punitive damages, and
injunctive and other relief.  On January 11, 1999, the Court granted the
defendants' request to stay further proceedings in this matter, except for
a case management conference set for March 29,1999, until after the hearing
and ruling on the defendants' motion to dismiss, which was filed on January
19, 1999 and was taken under advisement on March 26, 1999.  While the
Company does not believe this matter will have a material adverse effect on
its consolidated financial position, results of operations or liquidity,
there can be no assurance that this will be the case.

OTHER LITIGATION MATTERS

          Kaiser is involved in significant legal proceedings, including
environmental and asbestos litigation.  See Item 1.  "Business--Aluminum
Operations--Environmental and Asbestos Contingencies" and "--
Miscellaneous".

          The Company is involved in other claims, lawsuits and other
proceedings, including certain pending or threatened actions seeking to
prevent Pacific Lumber and Scotia LLC from harvesting under certain of
their THPs and conducting certain other operations.  While uncertainties
are inherent in the final outcome of such matters and it is presently
impossible to determine the actual costs that ultimately may be incurred,
management believes that the resolution of such uncertainties and the
incurrence of such costs should not have a material adverse effect on the
Company's consolidated financial position, results of operations or
liquidity.


ITEM 4.        SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

          Not applicable.

                                  PART II


ITEM 5.        MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
               STOCKHOLDER MATTERS

          All of the Company's common stock is owned by MAXXAM. 
Accordingly, the Company's common stock is not traded on any stock exchange
and has no established public trading market.  The 12% Senior Secured Notes
due 2003 of the Company (the "MGHI NOTES") are secured by the common stock
of MGI and the Pledged Kaiser Shares.  See Item 7. "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Financial
Condition and Investing and Financing Activities" and Note 5 to the
Consolidated Financial Statements appearing in Item 8.


ITEM 6.   SELECTED FINANCIAL DATA

          Not applicable.


ITEM 7.   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
               RESULTS OF OPERATIONS

BACKGROUND

          This section contains statements which constitute "forward-
looking statements" within the meaning of the Private Securities Litigation
Reform Act of 1995.  See Item 1. "Business--General" for cautionary
information with respect to such forward-looking statements.

          The Company was formed on November 4, 1996, to facilitate the
offering of the $130.0 million aggregate principal amount of the MGHI
Notes.  Subsequent to its formation, the Company received, as a capital
contribution from MAXXAM, 100% of the capital stock of MGI and 27,938,250
shares of Kaiser common stock (the "KAISER SHARES") representing a
35.3% interest in Kaiser on a fully diluted basis as of December 31, 1998. 
The contribution of MGI's capital stock has been accounted for as a
reorganization of entities under common control, which requires the Company
to record the assets and liabilities of MGI at MAXXAM's historical cost and
to also reflect both the historical operating results of MGI and MAXXAM's
purchase accounting adjustments which principally relate to MGI's timber
and depreciable assets.  The contribution of the Kaiser Shares has been
reflected in the Consolidated Financial Statements of the Company as if
such contribution occurred as of the beginning of the earliest period
presented at MAXXAM's historical cost using the equity method of
accounting.

          The Company's wholly owned subsidiary, MGI, and MGI's principal
operating subsidiaries, Pacific Lumber and Britt are engaged in forest
products operations.  The Company's business is highly seasonal and has
historically been significantly higher in the months of April through
November than in the months of December through March.  Management expects
that the Company's revenues and cash flows will continue to be markedly
seasonal.  The impact of seasonality on the Company's results is expected
to become more pronounced than it has been historically because of the
harvesting, road use, wet weather and other restrictions imposed by the
Final HCP.  As a result, a substantial majority of the future harvesting on
Pacific Lumber's timberlands can be expected to be concentrated during the
period from June through October of each year.  Some of these restrictions
may be modified under the adaptive management provision contained in the
Final HCP and as a result of the watershed analysis process to be performed
over the five-year period beginning March 1, 1999.  See Item 1. "Business--
Regulatory and Environmental Matters and Headwaters Agreement--The Final
Plans."  The following should be read in conjunction with the Company's
Consolidated Financial Statements and the Notes thereto appearing in Item
8.

          Old growth trees constitute Pacific Lumber's principal source of
upper grade redwood lumber, Pacific Lumber's most valuable product.  Due to
the severe restrictions on Pacific Lumber's ability to harvest old growth
timber on its property, Pacific Lumber's supply of upper grade lumber has
decreased in a number of premium product categories.  Furthermore, logging
costs have increased primarily due to the harvest of smaller diameter logs
and, to a lesser extent,  compliance with environmental regulations
relating to the harvesting of timber and litigation costs incurred in
connection with certain THPs filed by Pacific Lumber.  Pacific Lumber has
been able to lessen the impact of these factors by instituting a number of
measures at its sawmills during the past several years designed to enhance
the efficiency of its operations, such as modernization and expansion of
its manufactured lumber facilities and other improvements in lumber
recovery.  As a result of further limitations on harvesting old growth
trees under the Final HCP and the Final SYP, Pacific Lumber expects that
its production of premium upper grade lumber products will decline further
and that its manufactured lumber products will constitute a higher
percentage of its shipments of upper grade lumber products.  See also Item
1. "Business--Regulatory and Environmental Factors and Headwaters
Agreement."

          The Company follows the equity method of accounting for its
investment in Kaiser.  As discussed more fully in Note 4 to the
Consolidated Financial Statements,  until August 1997, cumulative losses
with respect to the results of operations attributable to Kaiser's common
stockholders exceeded cumulative earnings.  However, this was no longer the
case when equity attributable to Kaiser's common stockholders increased
upon conversion of the PRIDES into Kaiser common stock on August 29, 1997. 
As a result, the Company recorded a $33.4 million adjustment to reduce the
stockholder's deficit reflecting the Company's 35.4% equity in the impact
of the PRIDES conversion on the common stockholders.  In addition, the
Company began recording its equity in Kaiser's results of operations.  See
Note 4 to the Notes to the Consolidated Financial Statements for further
information,  including summarized financial information of Kaiser.

     RESULTS OF OPERATIONS

          The following table presents selected operational and financial
information for the years ended December 31, 1998, 1997 and 1996.

<TABLE>
<CAPTION>

                                                    YEARS ENDED DECEMBER 31,
                                           ----------------------------------------
                                                1998          1997          1996
                                           ------------  ------------  ------------
                                                    (IN MILLIONS OF DOLLARS,
                                                  EXCEPT SHIPMENTS AND PRICES)
<S>                                        <C>           <C>           <C>
Shipments:
     Lumber: (1)
          Redwood upper grades                     41.9          52.4          49.7 
          Redwood common grades                   230.1         244.2         229.6 
          Douglas-fir upper grades                  6.9          11.5          10.6 
          Douglas-fir common grades                47.5          75.3          74.9 
          Other                                     7.0          14.5          17.2 
                                           ------------  ------------  ------------ 
               Total lumber                       333.4         397.9         382.0 
                                           ============  ============  ============ 
     Logs (2)                                       3.2          11.9          20.1 
                                           ============  ============  ============
     Wood chips (3)                               176.7         237.8         208.9 
                                           ============  ============  ============
Average sales price:
     Lumber: (4)
          Redwood upper grades             $      1,478  $      1,443  $      1,380 
          Redwood common grades                     540           531           511 
          Douglas-fir upper grades                1,280         1,203         1,154 
          Douglas-fir common grades                 346           455           439 
     Logs (4)                                       449           414           477 
     Wood chips (5)                                  70            73            76 

Net sales:
     Lumber, net of discount               $      211.6  $      256.1  $      234.1 
     Logs                                           1.5           4.9           9.6 
     Wood chips                                    12.3          17.4          15.8 
     Cogeneration power                             3.9           4.5           3.3 
     Other                                          4.3           4.3           1.8 
                                           ------------  ------------  ------------
          Total net sales                  $      233.6  $      287.2  $      264.6 
                                           ============  ============  ============
Operating income                           $       40.6  $       84.5  $       73.0 
                                           ============  ============  ============
Operating cash flow (6)                    $       63.1  $      110.6  $      100.2 
                                           ============  ============  ============
Income (loss) before income taxes and
     extraordinary item                    $      (27.3) $       23.8  $        5.9 
                                           ============  ============  ============
Net income (loss)                          $      (59.8) $       18.6  $        6.2 
                                           ============  ============  ============
Capital expenditures                       $       22.0  $       22.9  $       15.2 
                                           ============  ============  ============

<FN>

- ---------------
     (1)  Lumber shipments are expressed in millions of board feet.
     (2)  Log shipments are expressed in millions of feet, net Scribner
          scale.
     (3)  Wood chip shipments are expressed in thousands of bone dry units
          of 2,400 pounds.
     (4)  Dollars per thousand board feet.
     (5)  Dollars per bone dry unit.
     (6)  Operating income before depletion and depreciation, also referred
          to as "EBITDA."

</TABLE>

          Operating Results 
          Net sales declined from $287.2 million for the year ended
December 31, 1997 to $233.6 million for the year ended December 31, 1998
primarily due to lower shipments of lumber, logs and wood chips. The
decline in shipments which occurred during the first half of 1998 was
principally due to well-above-normal rainfall which reduced demand for
lumber products and severely limited the availability of rail
transportation. The increased rainfall, combined with additional
restrictions on Pacific Lumber's wet weather operations pursuant to the
terms of the 1998 TOL, and the applicability of logging restrictions during
the nesting seasons for both the northern spotted owl and the marbled
murrelet, also impeded Pacific Lumber's ability to transport logs to its
mills and hindered logging operations, thereby reducing the volume of logs
available for the production of lumber products. Revenues for the second
half of 1998 were primarily affected by a reduction in the volume of logs
harvested and converted into lumber products. Pacific Lumber's reduced
harvest level during the second half of 1998 was due in substantial part to
the absence of a sufficient number of THPs available for harvest to enable
it to conduct its operations at levels consistent with those in the
comparable period of 1997. The diminished supply of available THPs was
attributable to a reduced volume of approved THPs as well as regulatory and
judicial restrictions imposed upon harvesting activities in areas covered
by previously approved THPs.  See Note 9 to the Consolidated Financial
Statements.  These difficulties in harvesting and transporting logs
affected the types of logs available for the mills and Pacific Lumber's
ability to produce a desirable mix of lumber products which in turn
adversely affected sales.

          The reduced number of approved THPs was, and continued to be,
attributable to several factors, including a significantly reduced level of
THPs submitted by Pacific Lumber to the CDF during 1998 and during the
first two months of 1999 due to (a) the extensive amount of time devoted by
Pacific Lumber's foresters, wildlife and fisheries biologists and other
personnel to (i) amending a significant number of previously submitted THPs
to incorporate various new requirements which Pacific Lumber agreed to as
part of the February 27, 1998 Pre-Permit Application Agreement (the "PRE-
PERMIT AGREEMENT"), (ii) preparing the Combined Plan and all the related
data, responding to comments on the Combined Plan, assessing and responding
to federal and state proposals and changes concerning the Combined Plan and
incorporated into the Final Plans, (iii) responding to comments received by
Pacific Lumber from various federal and state governmental agencies with
respect to its filed THPs in light of the new and more stringent
requirements that Pacific Lumber agreed to observe pursuant to the Pre-
Permit Agreement, and (iv) responding to newly filed litigation involving
certain of Pacific Lumber's approved THPs (see Item 3.  "Legal
Proceedings") and (b) implementation of a provision contained in the Pre-
Permit Agreement which requires, for the first time, a licensed geologist
to review virtually all of Pacific Lumber's THPs prior to submission to the
CDF. Pacific Lumber has also experienced an unexpected significantly slower
rate of review and approval with respect to its filed THPs due, in large
part, to the issues that have emerged in applying the requirements embodied
in the Pre-Permit Agreement to Pacific Lumber's THPs, certain of which
requirements impose new forestry practices that apply solely to Pacific
Lumber's operations.  As a result of the factors discussed above, Pacific
Lumber had a severely diminished inventory of approved THPs at March 1,
1999 which continues to limit Pacific Lumber's ability to conduct
harvesting operations and provide an adequate supply of logs to meet its
lumber production requirements.

          With the consummation of the Headwaters Agreement, Pacific
Lumber has completed its work in connection with preparation of the Final
Plans; however, significant additional work will be required in connection
with its implementation.  The remainder of 1999 will be a transition year
for Pacific Lumber with respect to the filing and approval of its THPs. 
Certain of the THPs which were approved by the CDF prior to March 1, 1999
were grandfathered under the Final Plans, and are harvestable subject to
the harvesting restrictions prescribed under the THPs and satisfaction of
certain agreed conditions.  The remaining THPs which were in the process of
being reviewed but were not yet approved by the CDF at the time of the
consummation of the Final Plans each require varying degrees of revisions
in order to comply with the requirements of the Final Plans.  The rate of
submissions of THPs and the review and approval of THPs during the next
quarter may be slower than Pacific Lumber has historically experienced as
Pacific Lumber and the CDF develop procedures for implementing the Final
Plans.  Accordingly, Pacific Lumber believes that its rate of new THP
submissions will not increase until some time in the second or third
quarter of 1999.  Nevertheless, Pacific Lumber anticipates that after a
transition period, the implementation of the Final Plans will streamline
the process of preparing THPs and potentially shorten the time required to
obtain approval of THPs.  However, there can be no assurance that Pacific
Lumber will not continue to experience difficulties in submitting and
receiving approvals of its THPs similar to those it has been experiencing. 

          Net sales for 1997 increased over 1996 due to higher average
realized prices and shipments for most categories of redwood and Douglas-
fir lumber. 

          See "--Financial Condition and Investing and Financing
Activities."

          Operating Income
          Operating income for the year ended December 31, 1998 decreased
from the comparable prior year period primarily due to the decrease in net
sales discussed above. This impact was partially offset by a decrease in
depletion expense as a result of the decline in volumes discussed above and
a decrease in logging costs for the year ended December 31, 1998 from the
prior year period.  Operating income for 1997 increased over 1996
principally due to the increase in net sales discussed above.

          Income (Loss) Before Income Taxes and Extraordinary Item
          The Company had a loss before income taxes and extraordinary item
for the year ended December 31, 1998 as compared to income for the 1997
period primarily due to the decrease in operating income discussed above. 
Results for the 1998 period were also affected by a decrease in equity in
earnings of Kaiser and, to a lesser degree, a decrease in investment income
from marketable securities.  Kaiser's results for 1998 were negatively
affected by strike related costs, a write down of its Micromill assets and
lower aluminum prices.  Income before income taxes for 1997 increased over
1996 principally due to higher operating income discussed above, and due to
an increase in net gains on marketable securities in 1997 and equity in
earnings of Kaiser of $7.0 million.

          Preliminary 1999 Results
          The Company's operating results for 1999 will be adversely
affected by the decrease in log and lumber inventories, which is a result
of the severely diminished level of available THPs.  Pacific Lumber had an
inventory of approved THPs for the harvesting of approximately 61,000 gross
Mbf of timber as of March 1, 1999, subject to satisfaction of certain
agreed conditions.  Pacific Lumber anticipates that, upon expiration of the
restricted period of road use imposed under the Final HCP, and given
favorable weather conditions, Pacific Lumber should be able to resume more
normal harvesting activities in June 1999.  Pacific Lumber has terminated
or laid off over 200 employees in 1999, and more layoffs will be required. 
In addition, Pacific Lumber has partially curtailed operations at all of
its mills.  Pacific Lumber expects that such curtailments will continue for
several months until such time as log inventories are adequate to achieve
normal lumber production levels.  Lumber shipments in 1999 are expected to
be adversely affected by this slowdown in production.

FINANCIAL CONDITION AND INVESTING AND FINANCING ACTIVITIES

          This section contains statements which constitute "forward-
looking statements" within the meaning of the Private Securities Litigation
Reform Act of 1995.  See Item 1. "Business--General" for cautionary
information with respect to such forward-looking statements.

          In December 1996, MGHI issued $130.0 million aggregate principal
amount of the MGHI Notes.  Net proceeds of $125.0 million received from the
offering of the MGHI Notes have been loaned to MAXXAM pursuant to an
intercompany note (the "MAXXAM NOTE"). Pursuant to the terms of the MAXXAM
Note, MAXXAM is entitled to defer the payment of interest on the MAXXAM
Note on any interest payment date to the extent that the Company has
sufficient available funds to satisfy its obligations on the MGHI Notes on
such date.  Any such deferred interest will be added to the principal
amount of the MAXXAM Note and will be payable at maturity.  Interest
deferred on the MAXXAM Note as of December 31, 1998 amounted to $7.8
million.  In January 1999, MAXXAM elected to defer all of the $7.3 million
interest payment due to the Company on February 1, 1999.  The deferred
amount effectively increases the note receivable balance to $140.1 million. 
The Company's ability to service its indebtedness is largely dependent on
dividends received from MGI, and to a considerably lesser extent, interest
payments from MAXXAM.  The MGHI Indenture contains covenants which
generally limit dividends from MGI to MGHI to the greater of $18.7 million
per year or, on a cumulative basis since September 30, 1996, to MGI's
consolidated net income plus consolidated depreciation and depletion.  On
January 29, 1999, cash dividends of $18.7 million were paid by MGI.  The
Company expects to receive annual cash dividends from MGI of at least $18.7
million for the next several years; however, subject to the conditions of
the Escrow Agreement, the Company may receive a portion of the proceeds
from the sale of the Headwaters Timberlands.  

          On July 20, 1998, Scotia LLC issued $867.2 million aggregate
principal amount of  Timber Notes.  Proceeds from the offering of the
Timber Notes were used primarily to prepay Scotia Pacific's 7.95% Timber
Collateralized Notes due 2015 (the "OLD TIMBER NOTES") and to redeem the
10-1/2% Pacific Lumber Senior Notes due 2003 (the "PACIFIC LUMBER SENIOR
NOTES"), the 11-1/4% MGI Senior Secured Notes due 2003 and the 12-1/4% MGI
Senior Secured Discount Notes due 2003 (collectively, the "MGI NOTES")
effective August 19, 1998.  In addition to principal payments, proceeds
from the issuance of the Timber Notes were used to pay redemption premiums
and financing costs, and provided $25 million for timberland acquisitions. 
The Company recognized an extraordinary loss of $41.8 million, net of
related income tax benefit of $23.6 million, for the early extinguishment
of the Old Timber Notes, the Pacific Lumber Senior Notes and the MGI Notes. 
 In connection with the issuance of the Timber Notes and redemption of the
MGI Notes, the Company agreed to amend the indenture for the MGHI Notes to,
among other things, pledge all of the 27,938,250 shares of Kaiser common
stock it owns to secure the MGHI Notes, 16,055,000 shares of which were
released from the pledge under the indenture governing the MGI Notes.  

          On December 18, 1998, Pacific Lumber's revolving credit agreement
(the "PACIFIC LUMBER CREDIT AGREEMENT") was amended and restated as a new
three-year credit facility.  The new facility allows borrowings up to $60
million, all of which may be used for revolving borrowings, $20 million of
which may be used for standby letters of credit and $30 million of which
may be used for timberland acquisitions.  Borrowings would be secured by all
of Pacific Lumber's domestic accounts receivable and inventory.  Borrowings
for timberland acquisitions would also be secured by the acquired
timberlands and, commencing in April 2001, are to be repaid annually from
50% of Pacific Lumber's cash flow (as defined).  The remaining 50% of cash
flow would be available for dividends.  Upon maturity of the facility, all
outstanding borrowings under the credit facility would convert to a term loan
repayable over four years.  As of December 31, 1998, $27.5 million of
borrowings was available under the agreement, no borrowings were
outstanding and letters of credit outstanding amounted to $14.4 million.

          The indenture governing the MGHI Notes, the indenture governing
the Timber Notes (the "TIMBER NOTES INDENTURE") and the Pacific Lumber
Credit Agreement contain various covenants which, among other things, limit
the ability to incur additional indebtedness and liens, to engage in
transactions with affiliates, to pay dividends and to make investments. 
Under the terms of the Timber Notes Indenture, Scotia LLC will generally
have available cash for distribution to Pacific Lumber when Scotia LLC's
cash flows from operations exceed the amounts required by the Timber Notes
Indenture to be reserved for the payment of current debt service (including
interest, principal and premiums) on the Timber Notes, capital expenditures
and certain other operating expenses.  Pacific Lumber can pay dividends in
an amount that is generally equal to 50% of Pacific Lumber's consolidated
net income plus depletion and cash dividends received from Scotia LLC,
exclusive of the net income and depletion of Scotia LLC as long as any
Timber Notes are outstanding. 

          Dividends paid are as follows:

<TABLE>
<CAPTION>


                                                        DIVIDENDS PAID FOR
                                                     YEARS ENDED DECEMBER 31,
                                            ----------------------------------------
                                                 1998          1997          1996
                                            ------------  ------------  ------------
                                                     (IN MILLIONS OF DOLLARS)
<S>                                         <C>           <C>           <C>
Scotia LLC                                  $      532.8  $       60.8  $       76.9 
                                            ============  ============  ============

Pacific Lumber                              $      270.0  $       23.0  $       20.5 
Britt                                                6.0           4.0           6.0 
                                            ------------  ------------  ------------
                                            $      276.0  $       27.0  $       26.5 
                                            ============  ============  ============
MGI                                         $       18.7  $        3.0  $        3.9 
                                            ============  ============  ============

</TABLE>

          Upon the retirement of the Old Timber Notes and the issuance of
the Timber Notes, $526.1 million, $263.0 million and $14.7 million cash
dividends were paid by Scotia LLC, Pacific Lumber and MGI, respectively.

           The Escrowed Funds of approximately $285.0 million are to be
made available as necessary to support the Timber Notes.  Under the Escrow
Agreement, the Escrowed Funds will be released by the Escrow Agent only in
accordance with resolutions duly adopted by the Board of Managers of Scotia
LLC and, unless the resolutions authorize the payment of funds
exclusively to, or to the order of, the Trustee or the Collateral Agent
under the Timber Notes Indenture, only if one or more of the following
conditions are satisfied:  (a) the resolutions authorizing the release of
the Escrowed Funds are adopted by a majority of the Board of Managers of
Scotia LLC (including the affirmative vote of the two independent
managers); (b) a Rating Agency Confirmation (as defined in the Timber Notes
Indenture) has been received that gives effect to the release or
disposition of funds directed by the resolutions; or (c) Scotia LLC has
received an opinion from a nationally recognized investment banking firm to
the effect that, based on the revised harvest schedule and the other
assumptions provided to such firm, the funds that would be available to
Scotia LLC based on such harvest schedule, assumptions and otherwise under
the Timber Notes Indenture after giving effect to the release or
disposition of funds directed by such resolutions would be adequate (i) to
pay Scheduled Amortization (as defined in the Timber Notes Indenture) on
the Class A-1 and Class A-2 Timber Notes and (ii) to amortize the Class A-3
Timber Notes on a schedule consistent with the original harvest schedule as
of July 9, 1998 (assuming that the Class A-3 Timber Notes are not
refinanced on January 20, 2014).

          Recent capital expenditures were made to improve production
efficiency, reduce operating costs and acquire additional timberlands.  The
Company's consolidated capital expenditures were $22.0 million, $22.9
million and $15.2 million for the years ended December 31, 1998, 1997 and
1996, respectively.  Capital expenditures, excluding expenditures for
timberlands, are estimated to be between $10.0 million and $12.0 million
per year for the 1999 - 2001 period.   Included in the 1998 capital
expenditures of $22.0 million is $12.4 million for timberland acquisitions. 
From January 1, 1999 through February 28, 1999, Scotia LLC acquired
additional timberlands for $10.6 million using funds from an amount held
for such acquisitions in an account by the trustee under the Timber Notes
Indenture.  Pacific Lumber and Scotia LLC may purchase additional
timberlands from time to time as appropriate opportunities arise, and such
purchases could exceed historical levels.

          As of December 31, 1998, the Company had working capital of
$165.2 million and long-term debt of $990.2 million (net of current
maturities) as compared to $164.7 million and $892.9 million, respectively,
at December 31, 1997.  The increase in long-term debt was primarily due to
the issuance of the Timber Notes, offset by the payment of the Old Timber
Notes and the redemption of the Pacific Lumber Senior Notes and the MGI
Notes.  Cash and marketable securities as of December 31, 1998 was $162.5
million, $156.9 million of which represents cash and marketable securities
held by subsidiaries.  The Company anticipates that existing cash,
marketable securities and available sources of financing will be sufficient
to fund its working capital and capital expenditure requirements for the
next year.  With respect to long-term liquidity, dividends from Scotia LLC
to Pacific Lumber will be limited for at least the next two to three years,
and therefore, absent any release to Pacific Lumber of the Escrowed Funds,
Pacific Lumber will not have adequate funds to support all of its working
capital and capital expenditure requirements, and it will require
contributions from MGI, its indirect parent, to meet any deficiencies. 
Although the Company believes that its existing cash and cash equivalents
should provide sufficient funds to meet the working capital and capital
expenditure requirements for itself and its subsidiaries, until such time
as Pacific Lumber has adequate cash flows from operations, dividends from
Scotia LLC and/or funds released from the Escrowed Funds, there can be no
assurance that this will be the case.  Furthermore, due to its highly
leveraged condition, the Company is more sensitive than less leveraged
companies to factors affecting its operations, including governmental
regulation and litigation affecting its timber harvesting practices (see
Note 9 to the Consolidated Financial Statements), increased competition
from other lumber producers or alternative building products and general
economic conditions.

TRENDS

          This section contains statements which constitute "forward-
looking statements" within the meaning of the Private Securities Litigation
Reform Act of 1995.  See Item 1.  "Business--General" for cautionary
information with respect to such forward-looking statements.

          The Company's forest products operations are conducted by Pacific
Lumber and Britt.  Pacific Lumber's operations are subject to a variety of
California and federal laws and regulations dealing with timber harvesting,
threatened and endangered species and habitat for such species, air and
water quality and restrictions imposed by the Final HCP.  Moreover, these
laws and regulations are modified from time to time and are subject to
judicial and administrative interpretation.  Compliance with such laws,
regulations and judicial and administrative interpretations, and related
litigation have increased the cost of logging operations.  There can be no
assurance that certain pending regulatory and environmental matters or
future governmental regulations, legislation or judicial or administrative
decisions, or adverse weather conditions, would not have a material adverse
effect on the Company's financial position, results of operations or
liquidity.  See Item 3. "Legal Proceedings" and Note 9 to the Consolidated
Financial Statements for further information regarding regulatory and legal
proceedings affecting the Company's operations.

YEAR 2000

          The Company has established a team to address the potential
impacts of the year 2000 on each of its critical business functions.  The
team has substantially completed its assessment of the Company's critical
information technology and embedded technology, including its geographic
information system and equipment and systems used in operating its sawmills
and cogeneration plant, and is now in the process of making the required
modifications for these systems to be year 2000 compliant.  The
modification costs are expected to be immaterial, costing less than
$100,000 and are expected to be completed by mid-year 1999.   In most cases
testing of the modifications will also be completed by such time.  Systems
modification costs are being expensed as incurred.  Costs associated with
new systems are being capitalized and will be amortized over the life of
the product. 

          In addition to addressing the Company's internal systems, the
team is in the process of identifying key vendors that could be impacted by
year 2000 issues, and surveys are being conducted.  The Company expects to 
evaluate the responses to the surveys over the next several months and will
make direct contact with parties which are deemed to be critical.  These
inquiries are being made by the Company's own staff, and the costs
associated with this program are expected to be minimal.

          Kaiser, the Company's equity investee, has implemented a company-
wide program to coordinate the year 2000 efforts of its individual business
units and to track their progress.  The intent of the program is to make
sure that critical items are identified on a sufficiently timely basis to
assure that the necessary resources can be committed to address any
material risk areas that could prevent its systems and assets from being
able to meet Kaiser's business needs and objectives.   Spending related to
this program, which began in 1997 and is expected to continue through 1999,
is estimated to be in the $10-15 million range.  Kaiser has established an
internal goal of having all necessary system changes in place and tested by
mid-year 1999.  Kaiser plans to commit the necessary resources to meet this
deadline.  In addition to addressing Kaiser's internal systems, the
company-wide program involves identification of key vendor and customer
relationships that could be impacted by year 2000 issues. 

          While the Company believes that its program is sufficient to
identify the critical issues and associated costs necessary to address
possible year 2000 problems in a timely manner, there can be no assurance
that the program, or underlying steps implemented, will be successful in
resolving all such issues prior to the year 2000.  If the steps taken by
the Company (or critical third parties) are not made in a timely manner, or
are not successful in identifying and remedying all significant year 2000
issues, business interruptions or delays could occur.   However, based on
the information the Company has gathered to date and its expectations of
its ability to remedy problems encountered, the Company believes that it
will not experience significant business interruptions that would have a
material impact on its results or financial condition.  The most reasonably
likely worst case scenario which the Company could experience would be
problems with certain of the Company's personal computers, field equipment,
financial software or GIS software.  The Company believes that any such
problems could be remedied at minimal cost within a few days and that
contingency plans used in the past for dealing with problems with its
equipment and software are adequate to address the types of problems which
could be encouraged in such a scenario.  These plans include purchases of
replacement equipment, use of third parties for processing GIS information
and working with vendors to make any needed software modifications.

RECENT ACCOUNTING PRONOUNCEMENTS

          Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" ("SFAS NO. 130") was adopted by the Company as of
January 1, 1998.  SFAS No. 130 requires the presentation of an additional
income measure (termed "comprehensive income") which adjusts traditional
net income for certain items that previously were only reflected as direct
charges to equity (such as minimum pension liabilities). 

          Statement of Financial Accounting Standards No. 133, "Accounting
for Derivative Instruments and Hedging Activities" ("SFAS NO. 133"), issued
in June 1998, requires companies to recognize all derivative instruments as
assets or liabilities in the balance sheet and to measure those instruments
at fair value.  Kaiser, the Company's equity investee,  has hedging
programs which use various derivative products to "lock-in" a price (or
range of prices) for products sold or used so that earnings and cash flows
are subject to reduced risk of volatility.  Under SFAS No. 133, Kaiser will
be required to "mark-to-market" its hedging positions at the end of each
period in advance of the period of recognition for the transaction to which
the hedge relates.  Pursuant to SFAS No. 130, Kaiser will reflect changes
in the fair value of its open hedging positions as an increase or reduction
in stockholders' equity through comprehensive income.  Under SFAS No. 130,
the impact of the changes in the fair value of financial instruments will
be reversed from comprehensive income (net of any fluctuations in other
"open" positions) and will be reflected in traditional net income upon
occurrence of the transaction to which the hedge relates.  Under the equity
method of accounting which the Company follows in accounting for its
investment in Kaiser, the Company will reflect its equity share of Kaiser's
adjustments to stockholder's equity through comprehensive income.

     ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

          This section contains statements which constitute "forward-
looking statements" within the meaning of the Private Securities Litigation
Reform Act of 1995.  See Item 1.  "Business--General" for cautionary
information with respect to such forward-looking statements.

          This item is not applicable for the Company and its subsidiaries;
however, Kaiser, the Company's equity investee, utilizes hedging
transactions to lock-in a specified price or range of prices for certain
products which it sells or consumes and to mitigate its exposure to changes
in foreign currency exchange rates.  See Exhibit 99.3 for information
relative to Kaiser's hedging activities.

ITEM 8.        FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

                  REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To MAXXAM Group Holdings Inc.:

          We have audited the accompanying consolidated balance sheets of
MAXXAM Group Holdings Inc. (a Delaware corporation and a wholly owned
subsidiary of MAXXAM Inc.) and subsidiaries as of December 31, 1998 and
1997, and the related consolidated statements of operations, cash flows and
stockholder's deficit for each of the three years in the period ended
December 31, 1998.  These financial statements and the schedule referred to
below are the responsibility of the Company's management.  Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.

          We conducted our audits in accordance with generally accepted
auditing standards.  Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement.  An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements.  An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation.  We believe that our audits
provide a reasonable basis for our opinion.

          In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the financial position of
MAXXAM Group Holdings Inc. and subsidiaries as of December 31, 1998 and
1997, and the results of their operations and their cash flows for each of
the three years in the period ended December 31, 1998, in conformity with
generally accepted accounting principles.

          Our audits were made for the purpose of forming an opinion on the
basic consolidated financial statements taken as a whole.  The schedule
listed in Item 14(a)(2) of this Form 10-K is presented for purposes of
complying with the Securities and Exchange Commission's rules and is not
part of the basic consolidated financial statements.  This schedule has
been subjected to the auditing procedures applied in the audits of the
basic consolidated financial statements and, in our opinion, is fairly
stated in all material respects in relation to the basic consolidated
financial statements taken as a whole.



                                        ARTHUR ANDERSEN LLP


San Francisco, California
March 1, 1999

                MAXXAM GROUP HOLDINGS INC. AND SUBSIDIARIES

                         CONSOLIDATED BALANCE SHEET
             (IN MILLIONS OF DOLLARS, EXCEPT SHARE INFORMATION)

<TABLE>
<CAPTION>


                                                         DECEMBER 31,
                                                    ----------------------
                                                       1998        1997
                                                    ----------  ----------
<S>                                                 <C>         <C>
                       ASSETS
Current assets:
     Cash and cash equivalents                      $    150.8  $     91.7 
     Marketable securities                                11.7        51.3 
     Receivables:                                                          
          Trade                                           10.5        19.3 
          Other                                            7.1         6.7 
     Inventories                                          44.0        61.4 
     Prepaid expenses and other current assets             8.0        13.1 
                                                    ----------  ----------
               Total current assets                      232.1       243.5 
Timber and timberlands, net of accumulated
     depletion of $178.4 and $169.2, respectively        302.3       299.1 
Property, plant and equipment, net of accumulated
     depreciation of $85.7 and $76.4 respectively        103.1       103.4 
Note receivable from MAXXAM Inc.                         132.8       125.0 
Investment in Kaiser Aluminum Corporation                 41.5        41.4 
Deferred financing costs, net                             26.2        25.7 
Deferred income taxes                                     90.4        58.8 
Restricted cash                                           16.6        28.4 
Other assets                                               7.2         4.2 
                                                    ----------  ----------
                                                    $    952.2  $    929.5 
                                                    ==========  ==========


       LIABILITIES AND STOCKHOLDER'S DEFICIT

Current liabilities:
     Accounts payable                                      3.4         3.5 
     Accrued interest                                     34.9        30.8 
     Accrued compensation and related benefits             8.4        12.6 
     Deferred income taxes                                 9.7        10.9 
     Other accrued liabilities                             2.2         1.6 
     Long-term debt, current maturities                    8.3        19.4 
                                                    ----------  ----------
               Total current liabilities                  66.9        78.8 
Long-term debt, less current maturities                  990.2       892.9 
Other noncurrent liabilities                              29.6        29.0 
                                                    ----------  ----------
               Total liabilities                       1,086.7     1,000.7 
                                                    ----------  ----------
Contingencies

Stockholder's deficit:
     Common stock, $1.00 par value; 3,000 shares
          authorized; 1,000 shares issued                    -           - 
     Additional capital                                  123.2       123.2 
     Accumulated deficit                                (257.7)     (194.4)
                                                    ----------  ----------
               Total stockholder's deficit              (134.5)      (71.2)
                                                    ----------  ----------
                                                    $    952.2  $    929.5 
                                                    ==========  ==========

<FN>
 The accompanying notes are an integral part of these financial statements.

</TABLE>


                MAXXAM GROUP HOLDINGS INC. AND SUBSIDIARIES

                    CONSOLIDATED STATEMENT OF OPERATIONS
                          (IN MILLIONS OF DOLLARS)


<TABLE>
<CAPTION>


                                                   YEARS ENDED DECEMBER 31,
                                          ----------------------------------------
                                               1998          1997          1996
                                          ------------  ------------  ------------
<S>                                       <C>           <C>           <C>
Net sales:
     Lumber and logs                      $      213.1  $      261.0  $      243.7 
     Other                                        20.5          26.2          20.9 
                                          ------------  ------------  ------------
                                                 233.6         287.2         264.6 
                                          ------------  ------------  ------------

Operating expenses:
     Cost of goods sold                          155.3         162.0         148.5 
     Selling, general and administrative          15.2          14.6          15.9 
          expenses
     Depletion and depreciation                   22.5          26.1          27.1 
                                          ------------  ------------  ------------
                                                 193.0         202.7         191.5 
                                          ------------  ------------  ------------

Operating income                                  40.6          84.5          73.1 

Other income (expense):
     Equity in earnings of Kaiser
          Aluminum Corporation                      .1           7.0             - 
     Investment, interest and other
          income                                  23.6          27.3          11.2 
     Interest expense                            (91.6)        (95.0)        (78.4)
                                          ------------  ------------  ------------
Income (loss) before income taxes and
     extraordinary item                          (27.3)         23.8           5.9 
Credit (provision) in lieu of income
     taxes                                         9.3          (5.2)           .3 
                                          ------------  ------------  ------------
Income (loss) before extraordinary item          (18.0)         18.6           6.2 
Extraordinary item:
     Loss on early extinguishment of
          debt, net of income tax benefit
          of $23.6                               (41.8)            -             - 
                                          ------------  ------------  ------------
Net income (loss)                         $      (59.8) $       18.6  $        6.2 
                                          ============  ============  ============

<FN>

 The accompanying notes are an integral part of these financial statements.

</TABLE>

                MAXXAM GROUP HOLDINGS INC. AND SUBSIDIARIES

                    CONSOLIDATED STATEMENT OF CASH FLOWS
                          (IN MILLIONS OF DOLLARS)

<TABLE>
<CAPTION>

                                                   YEARS ENDED DECEMBER 31,
                                          ----------------------------------------
                                               1998          1997          1996
                                          ------------  ------------  ------------
<S>                                       <C>           <C>           <C>
Cash flows from operating activities:
     Net income (loss)                    $      (59.8) $       18.6  $        6.2 
     Adjustments to reconcile net income
          (loss) to net cash provided by
          operating activities:
          Depletion and depreciation              22.5          26.1          27.1 
          Extraordinary loss on early
               extinguishment of debt,
               net                                41.8             -             - 
          Equity in undistributed
               earnings of Kaiser
               Aluminum Corporation                (.1)         (7.0)            - 
          Amortization of deferred
               financing costs and
               discounts on long-term
               debt                               11.5          16.6          14.7 
          Net sales (purchases) of
               marketable securities              42.6         (11.3)          9.5 
          Net gains on marketable
               securities                         (2.9)         (8.6)         (4.4)
          Increase (decrease) in cash                                              
               resulting from changes in:
               Receivables                         1.0          (5.2)          1.5 
               Inventories, net of
                    depletion                     14.0           9.7           6.0 
               Prepaid expenses and other
                    current assets                (2.7)         (5.4)           .7 
               Accounts payable                    (.3)          (.4)          (.2)
               Accrued interest                    4.0           5.6           (.1)
               Accrued and deferred
                    income taxes                 (10.5)          4.8           (.7)
               Other liabilities                  (4.0)          2.5          (3.5)
          Other                                   (1.8)           .1           (.7)
                                          ------------  ------------  ------------
          Net cash provided by operating
               activities                         55.3          46.1          56.1 
                                          ------------  ------------  ------------

Cash flows from investing activities:
     Capital expenditures                        (21.2)        (13.5)        (15.2)
     Issuance of note to MAXXAM Inc.                 -             -        (125.0)
     Net proceeds from sale of assets              6.6            .4            .1 
     Restricted cash withdrawals used to
          acquire timberlands                      8.9             -             - 
                                          ------------  ------------  ------------
          Net cash used for investing
               activities                         (5.7)        (13.1)       (140.1)
                                          ------------  ------------  ------------


Cash flows from financing activities:
     Proceeds from issuance of debt              867.2             -         130.0 
     Premiums for early retirement of
          debt                                   (45.5)            -             - 
     Principal payments on long-term debt       (796.8)        (16.3)        (14.1)
     Dividends paid                               (2.5)            -          (3.9)
     Restricted cash withdrawals, net              9.4           1.5           1.4 
     Incurrence of deferred financing
          costs                                  (22.4)            -          (4.2)
                                          ------------  ------------  ------------
          Net cash provided by (used for)
               financing activities                9.4         (14.8)        109.2 
                                          ------------  ------------  ------------

Net increase in cash and cash equivalents         59.0          18.2          25.2 
Cash and cash equivalents at beginning of
     year                                         91.8          73.6          48.4 
                                          ------------  ------------  ------------
Cash and cash equivalents at end of year  $      150.8  $       91.8  $       73.6 
                                          ============  ============  ============

<FN>
 The accompanying notes are an integral part of these financial statements.

</TABLE>

                MAXXAM GROUP HOLDINGS INC. AND SUBSIDIARIES

              CONSOLIDATED STATEMENT OF STOCKHOLDER'S DEFICIT 
                          (IN MILLION OF DOLLARS)

<TABLE>
<CAPTION>


     
     
                                                                          ACCUMU-
                                                                           LATIVE
                                                                           OTHER
                                 COMMON        ADDI-         ACCUM-       COMPRE-                     COMPRE-
                                 STOCK         TIONAL        ULATED       HENSIVE                     HENSIVE
                              ($1.00 PAR)     CAPITAL       DEFICIT        INCOME        TOTAL         INCOME    
                             ------------  ------------  ------------  ------------  ------------  ------------
<S>                          <C>           <C>           <C>           <C>           <C>           <C>
Balance, January 1, 1996     $          -  $       89.8  $     (216.3) $          -  $     (126.5)
     Net income                         -             -           6.2             -           6.2  $        6.2 
                                                                                                   ------------
     Comprehensive income                                                                          $        6.2 
                                                                                                   ============
     Dividends                          -             -          (3.9)            -          (3.9)
                             ------------  ------------  ------------  ------------  ------------
Balance, December 31, 1996              -          89.8        (214.0)            -        (124.2)
     Net income                         -             -          18.6             -          18.6  $       18.6 
     Equity in Kaiser
          Aluminum
          Corporation's
          reduction
          of pension
          liability                     -             -             -           1.0           1.0           1.0 
                                                                                                   ------------
     Comprehensive income                                                                          $       19.6 
                                                                                                   ============
     Gain from issuance of
          Kaiser Aluminum
          Corporation
          common stock due
          to PRIDES
          conversion                    -          33.4             -             -          33.4 
                             ------------  ------------  ------------  ------------  ------------
Balance, December 31, 1997              -         123.2        (195.4)          1.0         (71.2)
     Net loss                           -             -         (59.8)            -         (59.8) $      (59.8)
     Equity in Kaiser
          Aluminum
          Corporation's
          reduction
          of pension
          liability
          reversal                      -             -             -          (1.0)         (1.0)         (1.0)
                                                                                                   ------------
     Comprehensive loss                                                                            $      (60.8)
                                                                                                   ============
     Dividend                           -             -          (2.5)            -          (2.5)
                             ------------  ------------  ------------  ------------  ------------
Balance, December 31, 1998   $          -  $      123.2  $     (257.7) $          -  $     (134.5)
                             ============  ============  ============  ============  ============

<FN>

 The accompanying notes are an integral part of these financial statements.

</TABLE>


                MAXXAM GROUP HOLDINGS INC. AND SUBSIDIARIES

                 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


1.   BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

     FORMATION OF MGHI

          MAXXAM Group Holdings Inc. ("MGHI") was formed on November 4,
1996, to facilitate the offering of the $130.0 million aggregate principal
amount of 12% Senior Secured Notes due 2003 (the "MGHI NOTES") as described
in Note 5.  Subsequent to its formation, MGHI received, as a capital
contribution from MAXXAM Inc. ("MAXXAM"), 100% of the capital stock of
MAXXAM Group Inc. ("MGI") and 27,938,250 shares of the common stock of
Kaiser Aluminum Corporation ("KAISER") which represents a 35.3% interest in
Kaiser on a fully diluted basis as of December 31, 1998.  The contribution
of MGI's capital stock has been accounted for as a reorganization of
entities under common control, which requires MGHI to record the assets and
liabilities of MGI at MAXXAM's historical cost.  Accordingly, MGHI is the
successor entity to MGI and as such, the accompanying financial statements
of MGHI and its subsidiaries (together, the "COMPANY") reflect both the
historical operating results of MGI and MAXXAM's purchase accounting
adjustments which principally relate to MGI's timber and depreciable
assets.  The purchase accounting adjustments arose from MAXXAM's
acquisition of MGI in May 1988.  The contribution of the Kaiser common
stock has been reflected in the consolidated financial statements of the
Company as if such contribution occurred as of the beginning of the
earliest period presented, at MAXXAM's historical cost using the equity
method of accounting.  The Company conducts its business primarily through
the operations of its subsidiaries, including MGI.

     BASIS OF PRESENTATION

          The consolidated financial statements include the accounts of
MGHI and its subsidiaries.  MGHI is a wholly owned subsidiary of MAXXAM. 
Intercompany balances and transactions have been eliminated.  Certain
reclassifications have been made to prior years' financial statements to be
consistent with the current year's presentation.

          The Company's wholly owned subsidiary, MGI, and its wholly owned
subsidiaries, The Pacific Lumber Company ("PACIFIC LUMBER") and Britt
Lumber Co., Inc. ("BRITT") are engaged in forest products operations. 
Pacific Lumber's principal wholly owned subsidiaries are Scotia Pacific
Company LLC ("SCOTIA LLC") and Salmon Creek Corporation ("SALMON CREEK"). 
Pacific Lumber is engaged in several principal aspects of the lumber
industry, including the growing and harvesting of redwood and Douglas-fir
timber, the milling of logs into lumber and the manufacture of lumber into
a variety of finished products.  Britt manufactures redwood and cedar
fencing and decking products from small diameter logs, a substantial
portion of which are obtained from Pacific Lumber.  Housing, construction
and remodeling are the principal markets for the Company's lumber products. 

     USE OF ESTIMATES AND ASSUMPTIONS

          The preparation of financial statements in accordance with
generally accepted accounting principles requires the use of estimates and
assumptions that affect (i) the reported amounts of assets and liabilities,
(ii) the disclosure of contingent assets and liabilities known to exist as
of the date the financial statements are published and (iii) the reported
amount of revenues and expenses recognized during each period presented. 
The Company reviews all significant estimates affecting its consolidated
financial statements on a recurring basis and records the effect of any
necessary adjustments prior to their publication.  Adjustments made with
respect to the use of estimates often relate to improved information not
previously available.  Uncertainties with respect to such estimates and
assumptions are inherent in the preparation of the Company's consolidated
financial statements; accordingly, it is possible that the subsequent
resolution of any one of the contingent matters described in Note 9 could
differ materially from current estimates.  The results of an adverse
resolution of such uncertainties could have a material effect on the
Company's consolidated financial position, results of operations or
liquidity.

     SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

          Cash Equivalents
          Cash equivalents consist of highly liquid money market
instruments with original maturities of three months or less.

          Marketable Securities
          Marketable securities which consist of corporate bonds and long
and short positions in corporate common stocks are carried at fair value.
The cost of the securities sold is determined using the first-in, first-out
method.  Included in investment, interest and other income for each of the
three years ended December 31, 1998 were: 1998 - net unrealized holding
gains of $5.1 million and net unrealized losses of $2.2 million; 1997 - net
unrealized holding gains of $2.9 million and net realized gains of $5.7
million and; 1996 - net unrealized holding losses of $.9 million and net
realized gains of $5.3 million. 

          Inventories
          Inventories are stated at the lower of cost or market.  Cost is
primarily determined using the last-in, first-out ("LIFO") method.

          Timber and Timberlands
          Timber and timberlands are stated at cost, net of accumulated
depletion.  Depletion is computed utilizing the unit-of-production method
based upon estimates of timber values and quantities. 

          Property, Plant and Equipment
          Property, plant and equipment, including capitalized interest, is
stated at cost, net of accumulated depreciation.  Depreciation is computed
utilizing the straight-line method at rates based upon the estimated useful
lives of the various classes of assets.  The carrying value of property,
plant and equipment is assessed when events and circumstances indicate that
an impairment is present.  Impairment is determined by measuring
undiscounted future cash flows.  If an impairment is present, the asset is
reported at the lower of carrying value or fair value.

          Deferred Financing Costs
          Costs incurred to obtain financing are deferred and amortized
over the estimated term of the related borrowing.

          Restricted Cash
          At December 31, 1998, cash and cash equivalents includes $28.4
million, which is reserved for debt service payments on the Company's Class
A-1, Class A-2 and Class A-3 Timber Collateralized Notes due 2028 (the
"TIMBER NOTES").  At December 31, 1997, cash and cash equivalents includes 
$17.8 million, which was reserved for debt service payments on the
Company's 7.95% Timber Collateralized Notes due 2015 (the "OLD TIMBER
NOTES").  Long-term restricted cash at December 31, 1998 primarily
represents the amount held in an account by the trustee (the "PREFUNDING
ACCOUNT") under the indenture governing the Timber Notes (the "TIMBER NOTES
INDENTURE ") to enable Scotia LLC  to acquire timberlands.  Long-term
restricted cash at December 31, 1997 primarily represents the amount held
by the trustee in the liquidity account (the "LIQUIDITY ACCOUNT")
maintained by Scotia Pacific with respect to the Old Timber Notes for the
benefit of holders of the Old Timber Notes under the indenture governing
the Old Timber Notes.  

          Also included in cash and cash equivalents is restricted cash of
$46.4 million and $9.7 million at December 31, 1998 and 1997,
respectively, which is held in an interest-bearing account as security for
short positions in marketable securities.

          Concentrations of Credit Risk
          The amounts held by the trustee in an account restricted for debt
service payments on the Timber Notes (the "PAYMENT ACCOUNT") and held in
the Prefunding Account for purchase of timberlands are invested primarily
in commercial paper and other short-term investments.  The Company
mitigates its concentration of credit risk with respect to these restricted
cash deposits by purchasing only high grade investments (ratings of A1/P1
short-term or AAA/aaa long-term debt) having maturities of less than three
months.  No more than 10% is invested within the same issue.

          Fair Value of Financial Instruments
          The carrying amounts of cash equivalents and restricted cash
approximate fair value.  Marketable securities are carried at fair value
which is determined based on quoted market prices.  As of December 31, 1998
and 1997, the estimated fair value of long-term debt, including current
maturities, was $942.8 million and $955.2 million, respectively.  The
estimated fair value of long-term debt is determined based on the quoted
market prices for the publicly traded issues and on the current rates
offered for borrowings similar to the other debt.  Some of the Company's
publicly traded debt issues are thinly traded financial instruments;
accordingly, their market prices at any balance sheet date may not be
representative of the prices which would be derived from a more active
market.

2.        INVENTORIES

          Inventories consist of the following (in millions):

<TABLE>
<CAPTION>

                                                        DECEMBER 31,        
                                                --------------------------
                                                     1998          1997
                                                ------------  ------------
<S>                                             <C>           <C>
Lumber                                          $       36.0  $       49.8 
Logs                                                     8.0          11.6 
                                                ------------  ------------
                                                $       44.0  $       61.4 
                                                ============  ============

</TABLE>


3.        PROPERTY, PLANT AND EQUIPMENT

          The major classes of property, plant and equipment are as follows
(dollar amounts in millions):


<TABLE>
<CAPTION>

                                                            DECEMBER 31,
                                        ESTIMATED   --------------------------
                                       USEFUL LIVES      1998          1997
                                      ------------  ------------  ------------
<S>                                   <C>           <C>           <C>
Logging roads, land and improvements       15 years $       28.8  $       24.2 
Buildings                                  33 years         50.6          49.3 
Machinery and equipment                3 - 15 years        109.4         106.2 
Construction in progress                                       -            .1 
                                                    ------------  ------------
                                                           188.8         179.8 
Less:  accumulated depreciation                            (85.7)        (76.4)
                                                    ------------  ------------
                                                    $      103.1  $      103.4 
                                                    ============  ============

</TABLE>



          Depreciation expense for the years ended December 31, 1998, 1997
and 1996 was $9.8 million, $9.9 million and $9.5 million, respectively. 

4.        INVESTMENT IN KAISER

          Subsequent to its formation, the Company received, as a capital
contribution from MAXXAM, 27,938,250 shares of the common stock of Kaiser
all of which are pledged as collateral for the MGHI Notes (the "KAISER
SHARES").  Kaiser is a fully integrated  producer and marketer of alumina,
primary aluminum and fabricated aluminum products.  Kaiser's common stock
is publicly traded on the New York Stock Exchange under the trading symbol
"KLU."  The Kaiser Shares represent 35.3% equity interest in Kaiser at
December 31, 1998.

          The Company follows the equity method of accounting for its
investment in Kaiser.  As described in Note 1, the Company and MAXXAM are
entities under common control; accordingly, the Company has recorded its
investment in Kaiser at MAXXAM's historical cost.  During the first quarter
of 1993, losses exhausted Kaiser's equity with respect to its common
stockholders.  The Company recorded its equity share of such losses in
January 1993 up to the amount of its investment in the Kaiser Shares.  From
January 1993 until August 1997, cumulative losses with respect to the
results of operations attributable to Kaiser's common stockholders exceeded
cumulative earnings.  However, this was no longer the case when equity
attributable to Kaiser's common stockholders increased upon conversion of
the PRIDES into Kaiser common stock on August 29, 1997.  As a result, the
Company recorded a $33.4 million adjustment to reduce the stockholder's
deficit reflecting the Company's 35.4% equity interest in the impact of the
PRIDES conversion on the common stockholders.  In addition, the Company
began recording its equity in Kaiser's results of operations.

          The market value for the Kaiser Shares based on the price per
share quoted at the close of business on March 1, 1998 was $137.9 million 
There can be no assurance that such value would be realized should the
Company dispose of its investment in the Kaiser Shares.  The following
tables contain summarized financial information of Kaiser (in millions).

<TABLE>
<CAPTION>

                                                       DECEMBER 31,
                                               --------------------------
                                                    1998          1997
                                               ------------  ------------
<S>                                            <C>           <C>
Current assets                                 $    1,030.0  $    1,045.6 
Property, plant and equipment, net                  1,108.7       1,171.8 
Other assets                                          852.2         796.5 
                                               ------------  ------------
          Total assets                         $    2,990.9  $    3,013.9 
                                               ============  ============ 

Current liabilities                            $      558.4  $      594.1 
Long-term debt, less current maturities               962.6         962.9 
Other liabilities                                   1,227.2       1,212.2 
Minority interests                                    123.5         127.7 
Stockholders' equity:
     Common                                           119.2         117.0 
                                               ------------  ------------ 
                                                      119.2         117.0 
                                               ------------  ------------
          Total liabilities and
               stockholders' equity            $    2,990.9  $    3,013.9 
                                               ============  ============

</TABLE>



<TABLE>
<CAPTION>

                                               YEARS ENDED DECEMBER 31,
                                      ----------------------------------------
                                           1998          1997          1996
                                      ------------  ------------  ------------
<S>                                   <C>           <C>           <C>
Net sales                             $    2,256.4  $    2,373.2  $    2,190.5 
Costs and expenses                        (2,120.8)     (2,185.5)     (2,092.7)
Restructuring of operations                      -         (19.7)            - 
Impairment of assets                         (45.0)            -             - 
Other expenses-net                          (106.5)       (107.7)        (96.1)
                                      ------------  ------------  ------------
Income (loss) before income taxes
     and minority interests                  (15.9)         60.3           1.7 
Credit (provision) for income taxes           16.4          (8.8)          9.3 
Minority interests                              .1          (3.5)         (2.8)
                                      ------------  ------------  ------------
Net income                                      .6          48.0           8.2 
Dividends on preferred stock                     -          (5.5)         (8.4)
                                      ------------  ------------  ------------
Net income (loss) available to
     common stockholders              $         .6  $       42.5  $        (.2)
                                      ============  ============  ============
Equity in earnings of Kaiser          $         .1  $        7.0  $          - 
                                      ============  ============  ============

</TABLE>

5.        LONG-TERM DEBT

          Long-term debt consists of the following (in millions):

<TABLE>
<CAPTION>

                                                          DECEMBER 31,
                                                  --------------------------
                                                       1998          1997
                                                  ------------  ------------
<S>                                               <C>           <C>
7.43% Scotia LLC Timber Collateralized Notes due
     July 20, 2028                                $      867.2  $          - 
7.95% Scotia Pacific Timber Collateralized Notes
     due July 20, 2015                                       -         320.0 
10-1/2% Pacific Lumber Senior Notes due March 1,
     2003                                                    -         235.0 
Pacific Lumber Credit Agreement                              -           9.4 
11-1/4% MGI Senior Secured Notes due August 1,
     2003                                                    -         100.0 
12-1/4% MGI Senior Secured Discount Notes due                  
     August 1, 2003, net of discount                         -         117.3 
12% MGHI Senior Secured Notes due August 1, 2003         130.0         130.0 
Other                                                      1.3            .6 
                                                  ------------  ------------
                                                         998.5         912.3 
Less: current maturities                                  (8.3)        (19.4)
                                                  ------------  ------------
                                                  $      990.2  $      892.9 
                                                  ============  ============

</TABLE>

          Scotia LLC Timber Collateralized Notes due 2028
          On July 20, 1998, Scotia LLC issued $867.2 million aggregate
principal amount of Timber Notes which have an overall effective interest
rate of 7.43% per annum.  Net proceeds from the offering of the Timber
Notes were used primarily to prepay the Old Timber Notes and to redeem the
10-1/2% Pacific Lumber Senior Notes, the 11-1/4% MGI Senior Secured Notes
and the 12-1/4% MGI Senior Secured Discount Notes (collectively, the "MGI
NOTES") effective August 19, 1998.  The Company recognized an extraordinary
loss of $41.8 million, net of the related income tax benefit of $23.6
million, in 1998 for the early extinguishment of the Old Timber Notes, the
Pacific Lumber Senior Notes and the MGI Notes.  Concurrently with the
issuance of the Timber Notes, (i) Scotia Pacific was merged into Scotia
LLC, (ii) Pacific Lumber transferred to Scotia LLC approximately 13,500
acres of timberlands and the timber and timber harvesting rights with
respect to an additional 19,700 acres of timberlands, and (iii) Scotia LLC
transferred to Pacific Lumber the timber and timber harvesting rights
related to approximately 1,400 acres of timberlands.

          Under the Timber Notes Indenture, the business activities of
Scotia LLC are generally limited to the ownership and operation of its
timber and timberlands.  The Timber Notes are senior secured obligations of
Scotia LLC and are not obligations of, or guaranteed by, Pacific Lumber or
any other person.  The Timber Notes are secured by a lien on (i) Scotia
LLC's timber and timberlands (representing $252.0 million of the Company's
consolidated timber and timberlands balance at December 31, 1998), and (ii)
substantially all of Scotia LLC's other property.  Interest on the Timber
Notes is further secured by a line of credit agreement between Scotia LLC
and a bank pursuant to which Scotia LLC may borrow to pay interest on the
Timber Notes.  The Timber Notes Indenture permits Scotia LLC to have
outstanding up to $75.0 million of non-recourse indebtedness to acquire
additional timberlands and to issue additional timber notes provided
certain conditions are met (including repayment or redemption of the $160.7
million of Class A-1 Timber Notes).

          The Timber Notes are structured to link, to the extent of cash
available, the deemed depletion of Scotia LLC's timber (through the harvest
and sale of logs) to the required amortization of the Timber Notes.  The
required amount of amortization  on any Timber Notes payment date is
determined by various mathematical formulas set forth in the Timber Notes
Indenture.  The minimum amount of principal which Scotia LLC must pay (on a
cumulative basis and subject to available cash) through any Timber Notes
payment date in order to avoid an Event of Default is referred to as
Minimum Principal Amortization.  If the Timber Notes were amortized in
accordance with Minimum Principal Amortization, the final installment of
principal would be paid on July 20, 2028.  The minimum amount of principal
which Scotia LLC must pay (on a cumulative basis) through any Timber Notes
payment date in order to avoid payment of prepayment or deficiency premiums
is referred to as Scheduled Amortization.  If all payments of principal are
made in accordance with Scheduled Amortization, the payment date on which
Scotia LLC will pay the final installment of principal is January 20, 2014. 
Such final installment would include a single bullet principal payment of
$463.3 million related to the Class A-3 Timber Notes.

          Principal and interest on the Timber Notes are payable semi-
annually on January 20 and July 20.  The Timber Notes are redeemable at the
option of Scotia LLC at any time.  The redemption price of the Timber Notes
is equal to the sum of the principal amount, accrued interest and a
prepayment premium calculated based upon the yield of like-term Treasury
securities plus 50 basis points.

          As a result of the sale of approximately 5,600 acres of Pacific
Lumber's timberlands consisting of two forest groves commonly referred to
as the Headwater Forest and Elk Head Springs Forest (the "HEADWATERS
TIMBERLANDS") on March 1, 1999, Salmon Creek received proceeds of $299.9
million in cash.  See Note 12 to the Consolidated Financial Statements. 
Salmon Creek has deposited approximately $285.0 million of such proceeds
into an escrow  account (the  "ESCROWED FUNDS"), pursuant to an escrow
agreement (the "ESCROW AGREEMENT") as necessary to support the Timber
Notes.  The net proceeds of the sale of the Grizzly Creek grove will also
be placed in escrow (on the same basis as the net proceeds of the sale of
the Headwaters Timberlands) unless, at the time of receipt of such
proceeds, funds are no longer on deposit under the Escrow Agreement.

          Under the Escrow Agreement, the Escrowed Funds will be released
by the Escrow Agent only in accordance with resolutions duly adopted by
the Board of Managers of Scotia LLC and, unless the resolutions authorize
the payment of funds exclusively to, or to the order of, the Trustee or
the Collateral Agent under the Timber Notes Indenture, only if one or more
of the following conditions are satisfied:  (a) the resolutions authorizing
the release of the Escrowed Funds are adopted by a majority of the Board of
Managers of Scotia LLC (including the affirmative vote of the two
independent managers); (b) a Rating Agency Confirmation (as
defined in the Timber Notes Indenture) has been received that gives effect
to the release or disposition of funds directed by the resolutions; or (c)
Scotia LLC has received an opinion from a nationally recognized investment
banking firm to the effect that, based on the revised harvest schedule and
the other assumptions provided to such firm, the funds that would be
available to Scotia LLC based on such harvest schedule, assumptions and
otherwise under the Timber Notes Indenture after giving effect to the
release or disposition of funds directed by such resolutions would be
adequate (i) to pay Scheduled Amortization (as defined in the Timber Notes
Indenture) on the Class A-1 and Class A-2 Timber Notes and (ii) to amortize
the Class A-3 Timber Notes on a schedule consistent with the original
harvest schedule as of July 9, 1998 (assuming that the Class A-3 Timber
Notes are not refinanced on January 20, 2014).

          Pacific Lumber Credit Agreement
          On December 18, 1998, the Pacific Lumber Credit Agreement was
amended and restated as a new three-year senior secured credit facility
which expires on October 31, 2001.  The new facility allows for borrowings
of up to $60 million, all of which may be used for revolving borrowings,
$20 million of which may be used for standby letters of credit and $30
million of which may be used for timberland acquisitions.  Borrowings would
be secured by all of Pacific Lumber's domestic accounts receivable and
inventory.  Borrowings for timberland acquisitions would also be secured by
the acquired timberlands and, commencing in April 2001, are to be repaid
annually from 50% of Pacific Lumber's cash flow (as defined).  The
remaining excess cash flow is available for dividends.  Upon maturity of
the facility, all outstanding borrowings used for timberland acquisitions
will convert to a term loan repayable over four years.  At December 31,
1998, Pacific Lumber had $27.5 million of borrowings available under the
agreement, no borrowings were outstanding and letters of credit outstanding
amounted to $14.4 million.

          12% MGHI Senior Secured Notes due 2003 (the "MGHI NOTES")
          The MGHI Notes due August 1, 2003 are guaranteed on a senior,
unsecured basis by MAXXAM.  The common stock of MGI serves as security for
the MGHI Notes. Interest is payable semi-annually.  In connection with the
redemption of the MGI Notes and the issuance of the Timber Notes, MGHI
amended the indenture for the MGHI Notes, to among other things, pledge all
of the 27,938,250 shares of Kaiser common stock it owns, 16,055,000 shares
of which were released from the pledge securing the MGI Notes.

          The net proceeds from the offering of the MGHI Notes after
estimated expenses were approximately $125.0 million, all of which was
loaned to MAXXAM pursuant to an intercompany note (the "MAXXAM NOTE") which
is pledged to secure the MGHI Notes.  The MAXXAM Note bears interest at the
rate of 11% per annum (payable semi-annually on the interest payment dates
applicable to the MGHI Notes) and matures on August 1, 2003.  MAXXAM is
entitled to defer the payment of interest on the MAXXAM Note on any
interest payment date to the extent that the Company has sufficient
available funds to satisfy its obligations on the MGHI Notes on such date. 
Any such deferred interest will be added to the principal amount of the
MAXXAM Note and will be payable at maturity.  As of December 31, 1998, $7.8
million of interest had been deferred and added to principal.  An
additional $7.3 million was deferred and added to principal in January
1999.
 
          Maturities
          Scheduled maturities of long-term debt for the five years
following December 31, 1998 are: $8.3 million in 1999, $16.1 million in
2000, $16.5 million in 2001, $17.3 million in 2002, $149.5 million in 2003
and $790.8 million thereafter. 

          Restricted Net Assets of Subsidiaries
          As of December 31, 1998 and 1997, all of the assets of MGI and
its subsidiaries are subject to certain debt instruments which restrict the
ability to transfer assets, make loans and advances and pay dividends to
the Company.  As of December 31, 1998, under the most restrictive covenants
contained in the indentures governing the Timber Notes and the Pacific
Lumber Credit Agreement, Pacific Lumber could pay no dividends.

6.        CREDIT (PROVISION) IN LIEU OF INCOME TAXES

          Income taxes are determined using an asset and liability approach
which requires the recognition of deferred income tax assets and
liabilities for the expected future tax consequences of events that have
been recognized in the Company's financial statements or tax returns. 
Under this method, deferred income tax assets and liabilities are
determined based on the temporary differences between the financial
statement and tax bases of assets and liabilities using enacted tax rates.

          The Company and its subsidiaries are members of MAXXAM's
consolidated return group for federal income tax purposes.

          Pursuant to a tax allocation agreement between MAXXAM, Pacific
Lumber, and Salmon Creek (the "PL TAX ALLOCATION AGREEMENT"), Pacific
Lumber is liable to MAXXAM for the federal consolidated income tax
liability of Pacific Lumber, Scotia LLC and certain other subsidiaries of
Pacific Lumber (but excluding Salmon Creek) (collectively, the "PL
SUBGROUP") computed as if the PL Subgroup was a separate affiliated group
of corporations which was never connected with MAXXAM.  The PL Tax
Allocation Agreement further provides that Salmon Creek is liable to MAXXAM
for its federal income tax liability computed on a separate company basis
as if it was never connected with MAXXAM.  The remaining subsidiaries of
MGI are each liable to MAXXAM for their respective income tax liabilities
computed on a separate company basis as if they were never connected with
MAXXAM, pursuant to their respective tax allocation agreements.

          MGI's tax allocation agreement with MAXXAM (the "TAX ALLOCATION
AGREEMENT") provides that MGI's federal income tax liability is computed as
if MGI files a consolidated tax return with all of its subsidiaries except
Salmon Creek, and that such corporations were never connected with MAXXAM
(the "MGI CONSOLIDATED TAX LIABILITY").  The federal income tax liability
of MGI is the difference between (i) the MGI Consolidated Tax Liability and
(ii) the sum of the separate tax liabilities for MGI's subsidiaries
(computed as discussed above), but excluding Salmon Creek.  To the extent
that the MGI Consolidated Tax Liability is less than the aggregate amounts
in (ii), MAXXAM is obligated to pay the amount of such difference to MGI.

          The Company entered into a tax allocation agreement with MAXXAM
on December 23, 1996 (the "MGHI TAX ALLOCATION AGREEMENT") which provides
that the Company's federal consolidated tax liability is computed for MGHI
and its subsidiaries as if MGHI and its subsidiaries, except Salmon Creek,
file a consolidated tax return and that such corporations were never
connected with MAXXAM (the "MGHI CONSOLIDATED TAX LIABILITY").  The tax
amounts for prior years are calculated as if the MGHI Tax Allocation
Agreement was in effect during those years.  The federal income tax
liability of MGHI is the difference between the MGHI Consolidated Tax
Liability and the MGI Consolidated Tax Liability.  To the extent that the
MGHI Consolidated Tax Liability is less than the MGI Consolidated Tax
Liability, MAXXAM is obligated to pay the amount of such difference to
MGHI.

          The credit (provision) in lieu of income taxes on income (loss)
before income taxes and extraordinary item consists of the following (in
millions):


<TABLE>
<CAPTION>

                                                  YEARS ENDED DECEMBER 31,
                                         ----------------------------------------
                                              1998          1997          1996
                                         ------------  ------------  ------------
<S>                                      <C>           <C>           <C>
Current:
     Federal in lieu of income taxes     $         .1  $        (.4) $        (.2)
     State and local                              (.1)          (.1)            - 
                                         ------------  ------------  ------------
                                                    -           (.5)          (.2)
                                         ------------  ------------  ------------
Deferred:
     Federal in lieu of income taxes              7.1          (4.7)            - 
     State and local                              2.2             -            .5 
                                         ------------  ------------  ------------
                                                  9.3          (4.7)           .5 
                                         ------------  ------------  ------------
                                         $        9.3  $       (5.2) $         .3 
                                         ============  ============  ============

</TABLE>

          A reconciliation between the credit (provision) in lieu of income
taxes and the amount computed by applying the federal statutory income tax
rate to income (loss) before income taxes and extraordinary item is as
follows (in millions):

<TABLE>
<CAPTION>

                                                  YEARS ENDED DECEMBER 31,
                                         ----------------------------------------
                                              1998          1997          1996
                                         ------------  ------------  ------------
<S>                                      <C>           <C>           <C>
Income (loss) before income taxes and
     extraordinary item                  $      (27.4) $       23.8  $        5.9 
                                         ============  ============  ============

Amount of federal income tax credit
     (provision) based upon the
     statutory rate                      $        9.6  $       (8.3) $       (2.1)
Revision of prior years' tax estimates
     and other changes in valuation
     allowances                                  (1.4)           .9           3.4 
Equity in earnings of Kaiser not tax
     effected                                      .1           2.5             - 
State and local taxes, net of federal
     tax effect                                   1.3           (.1)          (.6)
Expenses for which no federal tax
     benefit is available                         (.3)          (.2)          (.5)
Other                                               -             -            .1 
                                         ------------  ------------  ------------
                                         $        9.3  $       (5.2) $         .3 
                                         ============  ============  ============

</TABLE>

          The revision of prior years' tax estimates and other changes in
valuation allowances as shown in the table above include amounts for the
reversal of reserves which the Company no longer believes are necessary,
other changes in prior years' tax estimates and changes in valuation
allowances with respect to deferred income tax assets.  Generally, the
reversal of reserves relates to the expiration of the relevant statute of
limitations with respect to certain income tax returns or the resolution of
specific income tax matters with the relevant tax authorities.  For the
year ended December 31, 1996, the reversal of reserves which the Company
believes are no longer necessary resulted in a credit to the income tax
provision of $3.2 million.  There were no reversals of reserves for the
years ended December 31, 1998 and 1997.

          The components of the Company's net deferred income tax assets
(liabilities) are as follows (in millions):



<TABLE>
<CAPTION>

                                                         DECEMBER 31,
                                                 --------------------------
                                                      1998          1997
                                                 ------------  ------------
<S>                                              <C>           <C>
Deferred income tax assets:
     Loss and credit carryforwards               $      114.7  $       69.1 
     Timber and timberlands                              37.4          34.6 
     Other                                               10.9          32.3 
     Valuation allowances                               (47.8)        (49.8)
                                                 ------------  ------------
          Total deferred income tax assets, net         115.2          86.2 
                                                 ------------  ------------
Deferred income tax liabilities:
     Property, plant and equipment                      (15.1)        (17.7)
     Inventories                                         (9.9)        (13.9)
     Other                                               (9.5)         (6.7)
                                                 ------------  ------------
          Total deferred income tax liabilities         (34.5)        (38.3)
                                                 ------------  ------------
Net deferred income tax assets                   $       80.7  $       47.9 
                                                 ============  ============

</TABLE>

          The valuation allowances listed above relate to loss and credit
carryforwards.  As of December 31, 1998, approximately $37.4 million of the
net deferred income tax assets listed above relate to the excess of the tax
basis over financial statement basis with respect to timber and
timberlands.  The Company believes it is more likely than not that this net
deferred income tax asset will be realized, based primarily upon the
estimated value of its timber and timberlands which is well in excess of
its tax basis.  Also included in net deferred income tax assets as of
December 31, 1998 is $66.9 million which relates to the benefit of loss and
credit carryforwards, net of valuation allowances.  The Company evaluated
all appropriate factors to determine the proper valuation allowances for
loss and credit carryforwards.  These factors included any limitations
concerning use of the carryforwards, the year the carryforwards expire and
the levels of taxable income necessary for utilization.  The Company has
concluded that it will more likely than not generate sufficient taxable
income to realize the benefit attributable to the loss and credit
carryforwards for which valuation allowances were not provided.

          Included in the net deferred income tax assets listed above are
$72.9 million and $43.0 million at December 31, 1998 and 1997,
respectively, which are recorded pursuant to the tax allocation agreements
with MAXXAM.

          The following table presents the estimated tax attributes for
federal income tax purposes for the Company and its subsidiaries as of
December 31, 1998, under the terms of the respective tax allocation
agreements (dollar amounts in millions).  The utilization of certain of
these attributes is subject to limitations.

<TABLE>
<CAPTION>

                                                                  EXPIRING
                                                                  THROUGH
                                                               ------------
<S>                                              <C>           <C>
Regular Tax Attribute Carryforwards:
     Net operating losses                               $311.8         2018 
Alternative Minimum Tax Attribute                                           
  Carryforwards:
     Net operating losses                               $280.0         2018 

</TABLE>

          The income tax credit (provision) related to other comprehensive
income for the years ended December 31, 1998 and 1997 were $(0.3) million
and $0.3 million, respectively.  There was no other comprehensive income
for the year ended December 31, 1996.

7.        EMPLOYEE BENEFIT PLANS

          In the fourth quarter of 1998, the Company adopted Statement of
Financial Accounting Standards No. 132, "Employers' Disclosures About
Pension and Other Postretirement Benefits" ("SFAS NO. 132"), which amends
Statements of Financial Accounting Standards Nos. 87, 88 and 106.  SFAS No.
132, among other things, standardizes the disclosure requirements for
pensions and other postretirement benefits and suggests combined formats
for presentation of such disclosures, but has no impact on the computation
of the reported amounts.  Prior year disclosures have been revised to
comply with SFAS No. 132.

          Pension and Other Postretirement Benefit Plans
          Pacific Lumber has a defined benefit plan which covers all
employees of Pacific Lumber.  Under the plan, employees are eligible for
benefits at age 65 or earlier, if certain provisions are met.  The benefits
are determined under a career average formula based on each year of service
with Pacific Lumber and the employee's compensation for that year.  Pacific
Lumber's funding policy is to contribute annually an amount at least equal
to the minimum cash contribution required by The Employee Retirement Income
Security Act of 1974, as amended.

          Pacific Lumber has an unfunded benefit plan for certain
postretirement medical benefits which covers substantially all employees of
Pacific Lumber.  Participants of the plan are eligible for certain health
care benefits upon termination of employment and retirement and
commencement of pension benefits.  Participants make contributions for a
portion of the cost of their health care benefits.  The expected costs of
postretirement medical benefits are accrued over the period the employees
provide services to the date of their full eligibility for such benefits.

          The following tables present the changes, status and assumptions
of Pacific Lumber's pension and other postretirement benefit plans as of
December 31, 1998 ( in millions):

<TABLE>
<CAPTION>

                                         PENSION BENEFITS         MEDICAL/LIFE BENEFITS
                                   --------------------------  --------------------------
                                                        DECEMBER 31,
                                   ------------------------------------------------------
                                       1998           1997         1998          1997
                                   ------------  ------------  ------------  ------------
<S>                                <C>           <C>           <C>           <C>
Change in benefit obligation:
     Benefit obligation at
          beginning of year        $       28.9  $       23.6  $        5.0  $       5.9 
     Service cost                           2.2           1.9            .3           .3 
     Interest cost                          2.2           1.9            .3           .3 
     Plan participants'
          contributions                       -             -            .2           .3 
     Plan amendments                          -            .9             -            - 
     Actuarial (gain) loss                  1.6           1.1           (.5)        (1.1)
     Benefits paid                          (.6)          (.5)          (.3)         (.7)
                                   ------------  ------------  ------------  ------------
          Benefit obligation at
               end of year                 34.3          28.9            5.0         5.0 
                                   ------------  ------------  ------------  ------------

Change in plan assets:
     Fair value of plan assets at
          beginning of year                25.9          21.8             -            - 
     Actual return on assets                3.5           4.0             -            - 
     Employer contributions                 1.1            .6            .1           .4 
     Plan participants'
          contributions                       -             -            .2           .3 
     Benefits paid                          (.6)          (.5)          (.3)         (.7)
                                   ------------  ------------  ------------  ------------
     Fair value of plan assets at
          end of year                      29.9          25.9             -            - 
                                   ------------  ------------  ------------  ------------ 

     Benefit obligation in excess
          of plan assets                    4.4           3.0           5.0          5.0 
     Unrecognized actuarial gain            4.4           4.2           1.5          1.0 
     Unrecognized prior service
          costs                             (.9)          (.9)            -            - 
                                   ------------  ------------  ------------   ---------- 
          Accrued benefit
               liability           $        7.9  $        6.3  $        6.5  $       6.0 
                                   ============  ============  ============  =========== 


</TABLE>

<TABLE>
<CAPTION>

                                         PENSION BENEFITS                        MEDICAL/LIFE BENEFITS
                            -----------------------------------------  ----------------------------------------
                                                           YEAR ENDED DECEMBER 31,
                            -----------------------------------------------------------------------------------
                                 1998           1997          1996          1998          1997          1996
                             ------------  ------------  ------------  ------------  ------------  ------------ 
<S>                         <C>            <C>           <C>           <C>           <C>           <C>
Components of net periodic
     benefit costs:
     Service cost           $         2.2  $        1.9  $        1.9  $         .3  $         .3  $         .3 
     Interest cost                    2.2           1.9           1.7            .3            .4            .4 
     Expected return on
          assets                     (1.8)         (1.5)         (1.3)            -             -             - 
     Amortization of prior
          service costs                .1             -             -             -             -             - 
     Recognized net
          actuarial (gain)
          loss                          -             -             -           (.1)          (.1)            - 
                             ------------  ------------  ------------  ------------  ------------  ------------ 
          Adjusted net
               periodic
               benefit
               costs        $         2.7  $        2.3  $        2.3  $         .5  $         .6  $         .7 
                             ============  ============  ============  ============  ============  ============ 



</TABLE>

<TABLE>
<CAPTION>
                                                                                       MEDICAL/LIFE
                                          PENSION BENEFITS                               BENEFITS
                              ----------------------------------------  ----------------------------------------
                                                            YEAR ENDED DECEMBER 31,
                              ----------------------------------------------------------------------------------
                                  1998           1997          1996          1998          1997          1996
                              ------------  ------------  ------------  ------------  ------------  ------------
<S>                          <C>            <C>           <C>           <C>           <C>           <C>
Weighted-average
     assumptions:
     Discount rate                    7.0%          7.3%          7.5%          7.0%          7.3%          7.5% 
     Expected return on plan
          assets                      8.0%          8.0%          8.0%            -             -             -  
     Rate of compensation
          increase                    5.0%          5.0%          5.0%          5.0%          5.0%          5.0% 

</TABLE>

Assumed health care cost trend rates have a significant effect on the
amounts reported for the health care plan.  A one-percentage-point change
in assumed health care cost trend rates as of December 31, 1998 would have
the following effects (in millions):


<TABLE>
<CAPTION>

                                      1-PERCENTAGE-POINT      1-PERCENTAGE-POINT
                                           INCREASE                DECREASE
                                    ----------------------  ----------------------
 <S>                                <C>                     <C>
 Effect on total of service and                                   
      interest cost components              $   .1                  $ (.1)

 Effect on the postretirement
      benefit obligations                       .7                    (.6)

</TABLE>

          Employee Savings Plan
          Pacific Lumber's employees are eligible to participate in a
defined contribution savings plan sponsored by MAXXAM.  This plan is
designed to enhance the existing retirement programs of participating
employees.  Employees may elect to defer up to 16% of their base
compensation to the plan.  For those participants who have elected to defer
a portion of their compensation to the plan, Pacific Lumber's matching
contributions are dollar for dollar up to 4% of the participant's
contributions for each pay period.  The cost to the Company of this plan
was $1.4 million, $1.5 million and $1.4 million for the years ended
December 31, 1998, 1997 and 1996, respectively.

          Workers' Compensation Benefits
          Pacific Lumber is self-insured for workers' compensation
benefits, whereas Britt is insured for workers' compensation benefits by an
outside party.  Included in accrued compensation and related benefits and
other noncurrent liabilities are accruals for workers' compensation claims
amounting to $10.8 million at both December 31, 1998 and 1997.  Workers'
compensation expenses amounted to $3.5 million, $4.7 million and $2.6
million for the years ended December 31, 1998, 1997 and 1996, respectively.

8.        RELATED PARTY TRANSACTIONS

          MAXXAM provides the Company and certain of the Company's
subsidiaries with accounting and data processing services.  In addition,
MAXXAM provides the Company with office space and various office personnel,
insurance, legal, operating, financial and certain other services. 
MAXXAM's expenses incurred on behalf of the Company are reimbursed by the
Company through payments consisting of (i) an allocation of the lease
expense for the office space utilized by or on behalf of the Company and
(ii) a reimbursement of actual out-of-pocket expenses incurred by MAXXAM,
including, but not limited to, labor costs of MAXXAM personnel rendering
services to the Company.  Charges by MAXXAM for such services were $3.5
million, $2.5 million and $2.7 million for the years ended December 31,
1998, 1997 and 1996, respectively.  The Company believes that the services
being rendered are on terms not less favorable to the Company than those
which would be obtainable from unaffiliated third parties.

9.        CONTINGENCIES

          Regulatory and environmental matters play a significant role in
the Company's business, which is subject to a variety of California and
federal laws and regulations, as well as the Final HCP and Final SYP
(defined below), dealing with timber harvesting practices, threatened and
endangered species and habitat for such species, and air and water quality. 
While regulatory and environmental concerns have resulted in restrictions
on the geographic scope and timing of the Company's timber operations,
increased operational costs and engendered litigation and other challenges
to the Company's operations, prior to 1998 they have not had a significant
adverse effect on the Company's financial position, results of operations
or liquidity.  However, the Company's 1998 results of operations were
adversely affected by certain regulatory and environmental matters,
including during the second half of 1998, the absence of a sufficient
number of available THPs to enable the Company to conduct its operations at
historic levels.

          On September 28, 1996, Pacific Lumber, including its subsidiaries
and affiliates, and MAXXAM  (the "PACIFIC LUMBER PARTIES") entered into an
agreement (the "HEADWATERS AGREEMENT") with the United States and
California which provided the framework for the acquisition of the
Headwaters Timberlands by the United States and California.  Consummation
of the Headwaters Agreement was also conditioned upon, among other things: 
approval of a sustained yield plan establishing long-term sustained yield
("LTSY") harvest levels for Pacific Lumber's timberlands (the "SYP"),
approval of a habitat conservation plan (the "HCP") covering multiple
species (the "MULTI-SPECIES HCP") and issuance of incidental take permits
related to the Multi-Species HCP ("PERMITS").  As further described in Note
12 "Subsequent Events," on March 1, 1999, the Pacific Lumber Parties, the
United States and California consummated the Headwaters Agreement.  In
addition to the transfer of the Headwaters Timberlands by the Pacific
Lumber Parties described in Note 12, Pacific Lumber received an approved
SYP (the "FINAL SYP"), Multi-Species HCP (the "FINAL HCP") and related
Permits.  The Pacific Lumber Parties and California also executed an
agreement regarding the enforcement of the California bill which authorized
state funds for the purchase of the Headwaters Timberlands while imposing
certain restrictions on the remaining timberlands held by the Pacific
Lumber Parties (the "CALIFORNIA AGREEMENT"). 

           The Final SYP complies with certain California Board of Forestry
regulations requiring timber companies to project timber growth and harvest
on their timberlands over a 100-year planning period and establish an LTSY
harvest level.  An SYP must demonstrate that the average annual harvest
over any rolling ten-year period will not exceed the LTSY harvest level and
that a timber company's projected timber inventory is capable of sustaining
the LTSY harvest level in the last decade of the 100-year planning period. 
Under the Final SYP, the Company's projected base average annual harvest
level in the first decade could be approximately 179 million board feet of
softwoods.  The Final SYP is effective for 10 years, and may be amended by
Pacific Lumber subject to approval by the CDF.  The Final SYP is subject to
review after five years.  Revised SYPs would be prepared every decade that
address the LTSY harvest level based upon reassessment of changes in the
resource base and other factors.

          Several species, including the northern spotted owl, the marbled
murrelet, the coho salmon and the steelhead trout, have been listed as
endangered or threatened under the ESA and/or the California Endangered
Species Act (the "CESA").  The Final HCP and the Permits allow incidental
"take" of listed species so long as there is no "jeopardy" to the continued
existence of such species.  The Final HCP identifies the measures to be
instituted in order to minimize and mitigate the anticipated level of take
to the greatest extent practicable.  The Final HCP  not only provides for
the Company's compliance with habitat requirements for the northern spotted
owl, the marbled murrelet, the coho salmon and the steelhead trout, it also
provides for issuance of Permits for thirteen additional species that are
or may be listed in the future.  The Final HCP and related Permits have a
term of 50 years, and, among other things, include the following protective
measures: (i) setting aside timberlands as marbled murrelet conservation
areas; (ii) establishing streamside "no-cut" and limited cut buffers as
well as mass wasting areas based on a five-year assessment of each of the
Company's watersheds; (iii) limiting harvesting activities during wet
weather conditions, and (iv) making certain specified improvements to the
Company's roads.   The Final SYP is also subject to the foregoing
provisions. The Company believes that the Final SYP and the Final HCP
should in the long-term expedite the preparation and facilitate approval of
its THPs, although there can be no assurance that the Company will not face
difficulties in the THP submission and approval process as it implements
these agreements.

          Lawsuits are threatened which seek to prevent the Company from
implementing the Final HCP and the Final SYP, and lawsuits are pending
concerning certain of the Company's approved THPs or other operations.  On
January 26, 1998 an action entitled Coho Salmon, et al v. Pacific Lumber,
et al, (the "COHO LAWSUIT") was filed against Pacific Lumber, Scotia
Pacific and Salmon Creek.  This action alleged, among other things,
violations of the ESA and claims that defendants' logging operations in
five watersheds have contributed to the "take" of the coho salmon.  In
March 1999, the Coho lawsuit was dismissed, with prejudice.  Pacific Lumber
has also received notice of additional threatened actions with respect to
the coho salmon.  On August 12, 1998, an action entitled Environmental
Protection Information Center, Inc., Sierra Club v. Pacific Lumber, Scotia
Pacific and Salmon Creek (the "EPIC LAWSUIT") was filed by two
environmental groups against Pacific Lumber, Scotia Pacific and Salmon
Creek under which the environmental groups allege that certain procedural
violations of the federal Endangered Species Act (the "ESA") have resulted
from logging activities on the Company's timberlands and seek to prevent
the defendants from carrying out any harvesting activities until certain
wildlife consultation requirements under the ESA are satisfied in
connection with the development of the Final HCP.  In March 1999, the court
affirmed a preliminary injunction on harvesting on three THPs; however, it
subsequently heard Pacific Lumber's motion to dismiss the case and issued
an order for the plaintiffs to show cause why the lawsuit should not be
dismissed as moot since the consultation requirement appears to have been
concluded.  On or about January 29, 1999, the Company received a notice
from EPIC and the Sierra Club ("EPIC NOTICE LETTER") of their intent to sue
Pacific Lumber and several federal and state agencies under the ESA.  The
letter alleges various violations of the ESA and challenges, among other
things, the validity and legality of the Permits.  The Company is unable to
predict the outcome of either the EPIC lawsuit or the EPIC Notice Letter or
their ultimate impact on the Company's financial condition or results of
operations or the ability to harvest timber on its THPs.  While the Company
expects environmentally focused objections and lawsuits to continue, it
believes that the Final HCP and the Permits should enhance its position in
connection with these challenges. 

          On November 9, 1998, the California Department of Forestry and
Fire Protection ("CDF") notified Pacific Lumber that it had suspended
Pacific Lumber's 1998 timber operator's license ("TOL").  As a result,
Pacific Lumber ceased all operations under its TOL and made the necessary
arrangements for independent contract loggers to be substituted where
necessary (independent contractors historically account for approximately
60% of the harvesting activities on the Company's timberlands).  On
February 26, 1999, the CDF issued Pacific Lumber a conditional TOL for
1999.  The 1999 TOL contains provisions which limit the use of roads during
wet weather conditions and provides for an enhanced compliance program. 
The CDF has also advised Pacific Lumber that if the 1999 TOL is revoked,
issuance of a new conditional license would be unlikely.  The Company does
not believe that the restrictions imposed by the 1999 TOL will have an
adverse effect on Pacific Lumber's or the Company's financial condition or
results of operations.

10.  SUPPLEMENTAL CASH FLOW AND OTHER INFORMATION


<TABLE>
<CAPTION>
     
                                                   YEARS ENDED DECEMBER 31,
                                          ----------------------------------------
                                               1998          1997          1996
                                          ------------  ------------  ------------
                                                        (IN MILLIONS)
<S>                                       <C>           <C>           <C>
Supplemental information on non-cash
     investing and financing activities:
     Acquisition of assets subject to
          other liabilities               $         .8  $        9.4  $          - 
     Deferral of interest on MAXXAM note
          receivable                               7.8             -             - 

Supplemental disclosure of cash flow
     information:
     Interest paid, net of capitalized
          interest                        $       78.2  $       73.1  $       63.8 
     Income taxes paid (refunded)                   .2            .2          (2.9)
     Tax allocation payments to MAXXAM              .2            .4            .2 

</TABLE>


11.  QUARTERLY FINANCIAL INFORMATION (UNAUDITED)

          Summary quarterly financial information for the years ended
December 31, 1998 and 1997 is as follows (in millions):

<TABLE>
<CAPTION>

                                                   THREE MONTHS ENDED
                                ------------------------------------------------------
                                   MARCH 31      JUNE 30    SEPTEMBER 30   DECEMBER 31
                                ------------  ------------  ------------  ------------
<S>                             <C>           <C>           <C>           <C>
1998:                                                                                  
     Net sales                  $       51.9  $       63.5  $       65.9  $       52.3 
     Operating income                   10.1          14.7          12.8           3.0 
     Income (loss) before
          extraordinary item              .9           3.7          (1.5)        (21.1)
     Extraordinary item, net               -             -         (41.8)            - 
     Net income (loss)                    .9           3.7         (43.4)        (21.0)

1997:
     Net sales                  $       66.8  $       76.8  $       72.8  $       70.8 
     Operating income                   18.8          24.3          23.1          18.3 
     Net income (loss)                   (.3)          5.0           5.8           8.1 

</TABLE>


12.  SUBSEQUENT EVENT

          As described in Note 9 above, on September 28, 1996, the Pacific
Lumber Parties entered into the Headwaters Agreement with the United States
and California which provided the framework for the acquisition by the
United States and California of the Headwaters Timberlands.  A substantial
portion of the Headwaters Timberlands contain virgin old growth timber. 
Approximately 4,900 of these acres were owned by Salmon Creek, with the
remaining acreage being owned by Pacific Lumber and Scotia LLC (Pacific
Lumber owning the timber and related timber harvesting rights on Scotia
LLC's acreage).  On March 1, 1999, the Pacific Lumber Parties, the United
States and California consummated the Headwaters Agreement.  Salmon Creek
received $299.9 million for its 4,900 acres and, for its 700 acres, Pacific
Lumber received the 7,700 acre Elk River Timberlands which are to be
contributed to Scotia LLC on or before August 1999.  Approximately $285.0
million of these proceeds have been deposited into an escrow account held by
an escrow agent and are to be made available as necessary to support the
Timber Notes, and may be released only under certain circumstances.

          As a result of the disposition of the Headwaters Timberlands, the
Company expects to recognize a pre-tax gain of approximately $240.0
million ($142.0 million, net of tax) in the first quarter of 1999.  This
amount represents the gain attributable to the portion of the Headwaters
Timberlands for which the Company received $299.9 million in cash.  With
respect to the remaining portion for which the Company received the Elk
River Timberlands, no gain has been recognized as this represented an
exchange of substantially similar productive assets.  These timberlands
will be reflected in the Company's financial statements at approximately
$6.0 million which represents the Company's historical cost for the
timberlands which were transferred to the United States.

          Scotia LLC and Pacific Lumber also entered into agreements with
California for the future sale to California of the Owl Creek and Grizzly
Creek groves (the "OWL CREEK AGREEMENT" and the "GRIZZLY CREEK AGREEMENT,"
respectively).  The Owl Creek Agreement provides for Scotia LLC to sell, on
or before June 30, 2002, the Owl Creek grove to California for the lesser
of the appraised fair market value or $79.7 million.  At California's
option, 25% of the payment may be paid upon closing with three equal annual
installments thereafter and without interest.  With respect to the Grizzly
Creek Agreement, California may purchase from Pacific Lumber, on or before
October 31, 2000, a portion of this grove for a purchase price determined
based on fair market value, but not to exceed $19.9 million.  The net
proceeds from the Grizzly Creek grove will be placed into an escrow account
(on the same basis as the net proceeds from the sale of the Headwaters
Timberlands) unless, at the time of receipt of such proceeds, the Escrowed
Funds are no longer held in an escrow account.  California also has a five
year option under the agreement to purchase additional property adjacent to
the Grizzly Creek grove which is within the Grizzly Creek conservation
area.   The sale of the Owl Creek or Grizzly Creek groves will not be
reflected in the Company's financial statements until they have been
concluded.

ITEM 9.   CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
               FINANCIAL DISCLOSURE

          None.


                                  PART III


          Not applicable.


                                  PART IV


ITEM 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

(A)  INDEX TO FINANCIAL STATEMENTS                                    
                                                                 PAGE

     1.   FINANCIAL STATEMENTS (INCLUDED UNDER ITEM 8):

Report of Independent Public Accountants                          30
Consolidated Balance Sheet at December 31, 1998 and 1997          31
Consolidated Statement of Operations for the Years Ended
     December 31, 1998, 1997 and 1996                             32
Consolidated Statement of Cash Flows for the Years Ended
     December 31, 1998, 1997 and 1996                             33
Consolidated Statement of Stockholder's Deficit                   34
Notes to Consolidated Financial Statements                        35

     2.   FINANCIAL STATEMENT SCHEDULES:

          Schedule I  -  Condensed Financial Information of
                              Registrant at December 31, 1998
                              and 1997 and for years ended
                              December 31, 1998 and 1997,
                              and for the period from
                              November 4, 1996 (inception)
                              to December 31, 1996                50
          The Consolidated Financial Statements and Notes thereto of
               MAXXAM Inc., MAXXAM Group Inc.  and Kaiser Aluminum
               Corporation are incorporated herein by reference and
               included as Exhibits 99.1, 99.2 and 99.3  hereto,
               respectively.

          All other schedules are inapplicable or the required
          information is included in the consolidated financial statements or
          the notes thereto.

(B)  REPORTS ON FORM 8-K

     There were no reports on Form 8-K during the fourth quarter of 1998. 
However, on March 24, 1999, the Company filed a current report on Form 8-K
(under Item 5) concerning the filing of a Prospectus Supplement to the
Prospectus dated December 30, 1998 of Scotia Pacific Company LLC, an
indirect wholly owned subsidiary of the Registrant, concerning the
consummation of the Headwaters Agreement and certain other developments
since the date of the Prospectus.

(C)  EXHIBITS

     Reference is made to the Index of Exhibits immediately preceding the
exhibits hereto (beginning on page 55), which index is incorporated
herein by reference.

         SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT

                         MAXXAM GROUP HOLDINGS INC.

                       BALANCE SHEET (UNCONSOLIDATED)
             (IN MILLIONS OF DOLLARS, EXCEPT SHARE INFORMATION)


<TABLE>
<CAPTION>

                                                           DECEMBER 31,
                                                   --------------------------
                                                        1998          1997
                                                   ------------  ------------
<S>                                                <C>           <C>
                      ASSETS

Current assets:
     Cash and cash equivalents                     $        5.6  $        1.9 
     Receivable from MAXXAM Inc.                            6.1           5.5 
                                                   ------------  ------------
          Total current assets                             11.7           7.4 
Note receivable from MAXXAM Inc.                          132.8         125.0 
Deferred income taxes                                      10.1           9.1 
Deferred financing costs                                    3.5           4.2 
                                                   ------------  ------------
                                                   $      158.1  $      145.7 
                                                   ============  ============
                                                                              
      LIABILITIES AND STOCKHOLDER'S DEFICIT

Current liabilities:
     Accounts payable and other accrued
          liabilities                              $        1.1  $        1.2 
     Accrued interest                                       6.5           6.5 
                                                   ------------  ------------
          Total current liabilities                         7.6           7.7 
Losses recognized in excess of investments in
     subsidiaries                                         155.0          79.2 
Long-term debt                                            130.0         130.0 
                                                   ------------  ------------
          Total liabilities                               292.6         216.9 
                                                   ------------  ------------

Stockholder's deficit:
     Common stock, $1.00 par value, 3,000 shares
          authorized, 1,000 shares issued                     -             - 
     Additional capital                                   123.2         123.2 
     Accumulated deficit                                 (257.7)       (194.4)
                                                   ------------  ------------
          Total stockholder's deficit                    (134.5)        (71.2)
                                                   ------------  ------------
                                                   $      158.1  $      145.7 
                                                   ============  ============


<FN>
   See notes to consolidated financial statements and accompanying notes.

</TABLE>


   SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED)
                         MAXXAM GROUP HOLDINGS INC.

             CONDENSED STATEMENT OF OPERATIONS (UNCONSOLIDATED)
                          (IN MILLIONS OF DOLLARS)


<TABLE>
<CAPTION>

                                                                     PERIOD FROM
                                                                     NOVEMBER 4,
                                                                         1996
                                                                     (INCEPTION)
                                                                          TO
                                          YEARS ENDED DECEMBER 31,   DECEMBER 31,
                                        --------------------------  ------------
                                             1998          1997          1996
                                        ------------  ------------  ------------
<S>                                     <C>           <C>           <C>
Investment, interest and other income   $       14.4  $       13.8  $         .3 
Interest expense                               (16.4)        (16.4)          (.4)
General and administrative expenses              (.3)          (.3)            - 
Equity in earnings (loss) of
     subsidiaries                              (56.1)         20.6           1.7 
                                        ------------  ------------  ------------
Income (loss) before income taxes and
     extraordinary item                        (58.4)         17.7           1.6 
Credit in lieu of income taxes                    .2            .9             - 
                                        ------------  ------------  ------------ 
Income (loss) before extraordinary
     item                                      (58.2)         18.6           1.6 
                                        ------------  ------------  ------------ 
Extraordinary Item:
     Loss on early extinguishment of
          debt, net of income taxes             (1.6)            -             - 
                                        ------------  ------------  ------------ 
Net income (loss)                       $      (59.8) $       18.6  $        1.6 
                                        ============  ============  ============

<FN>

   See notes to consolidated financial statements and accompanying notes.

</TABLE>

   SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED)

                         MAXXAM GROUP HOLDINGS INC.

             CONDENSED STATEMENT OF CASH FLOWS (UNCONSOLIDATED)
                          (IN MILLIONS OF DOLLARS)


<TABLE>
<CAPTION>

                                                                   PERIOD FROM
                                                                   NOVEMBER 4,
                                                                       1996
                                                                   (INCEPTION)
                                                                        TO
                                        YEARS ENDED DECEMBER 31,   DECEMBER 31,
                                      --------------------------  ------------
                                           1998          1997          1996
                                      ------------  ------------  ------------
<S>                                   <C>           <C>           <C>
Cash flows from operating
     activities:
     Net income (loss)                $      (59.8) $       18.6  $       1.6  
     Adjustments to reconcile net
          income (loss) to net cash 
          provided by (used for)
          operating activities:
          Extraordinary loss on
               early extinguishment
               of debt, net                    1.6             -             - 
          Amortization of deferred
               financing costs and
               discounts on
               long-term debt                   .8            .8             - 
          Equity in loss (earnings)
               of subsidiaries                56.1         (20.6)         (1.7)
          Dividends from
               subsidiaries                   18.7           3.0             - 
     Increase (decrease) in cash                                               
          resulting from changes in:
          Receivable from MAXXAM
               Inc.                           (8.4)         (5.5)            - 
          Accrued and deferred
               income taxes                    (.1)          (.8)           .3 
          Accrued interest and other
               liabilities                     (.1)          5.2           1.3 
     Other                                       -             -          (1.1)
                                      ------------  ------------  ------------ 
          Net cash provided by (used
               for) operating
               activities                      8.8           0.7            .4 
                                      ------------  ------------  ------------

Cash flows from investing
     activities:
     Issuance of note to MAXXAM Inc.             -             -        (125.0)
                                      ------------  ------------  ------------
          Net cash used for
               investing activities              -             -        (125.0)
                                      ------------  ------------  ------------

Cash flows from financing
     activities:
     Proceeds from issuance of long-
          term debt                              -             -         130.0 
     Consent fees for early
          retirement of
          subsidiaries' debt                  (2.6)            -             - 
     Dividends paid                           (2.5)            -             - 
     Incurrence of deferred
          financing costs                        -             -          (4.2)
                                      ------------  ------------  ------------
          Net cash provided by (used
               for) financing
               activities                     (5.1)            -         125.8 
                                      ------------  ------------  ------------

Net increase in cash and cash
     equivalents                               3.7            .7           1.2 
Cash and cash equivalents at
     beginning of year                         1.9           1.2             - 
                                      ------------  ------------  ------------
Cash and cash equivalents at end of
     year                             $        5.6  $        1.9  $        1.2 
                                      ============  ============  ============

<FN>

   See notes to consolidated financial statements and accompanying notes.

</TABLE>



   SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED)

                       NOTES TO FINANCIAL STATEMENTS


A.   DEFERRED INCOME TAXES

     The deferred income tax assets and liabilities reported in the
accompanying unconsolidated balance sheet are determined by computing such
amounts on a consolidated basis, as if MGHI files a consolidated tax return
with all of its subsidiaries except Salmon Creek, and as if such
corporations were never connected with MAXXAM, and then reducing such
consolidated amounts by the amounts recorded by the Company's subsidiaries,
but excluding Salmon Creek, pursuant to their respective tax allocation
agreements with MAXXAM.  The Company's net deferred income tax assets
relate primarily to loss and credit carryforwards, net of valuation
allowances.  The Company evaluated all appropriate factors to determine the
proper valuation allowances for these carryforwards, including any
limitations concerning their use, the year the carryforwards expire and the
levels of taxable income necessary for utilization.  Based on this
evaluation, the Company has concluded that it is more likely than not that
it will realize the benefit of these carryforwards for which valuation
allowances were not provided.

B.   LONG-TERM DEBT

     On December 23, 1996, the Company issued $130.0 million principal
amount of 12% Senior Secured Notes due August 1, 2003.  The MGHI Notes are
guaranteed on a senior, unsecured basis by the Company.  Interest is
payable semi-annually.  In connection with the redemption of the MGI Notes
and the issuance of the Timber Notes, MGHI has amended the indenture for
the MGHI Notes, to among other things, pledge all of the 27,938,250 shares
of Kaiser common stock it owns, 16,055,000 shares of which were released
from the pledge securing the MGI Notes.

C.   SUPPLEMENTAL CASH FLOW INFORMATION

<TABLE>
<CAPTION>
                                                                      PERIOD FROM
                                                                      NOVEMBER 4,
                                                                          1996
                                                                      (INCEPTION)
                                                                           TO
                                           YEARS ENDED DECEMBER 31,   DECEMBER 31,
                                         --------------------------  ------------
                                              1998          1997          1996
                                         ------------  ------------  ------------
                                                       (IN MILLIONS)
<S>                                      <C>           <C>           <C>
Supplemental information on non-cash
     investing and financing activities:
     Deferral of interest on MAXXAM note
          receivable                     $        7.8  $          -  $          - 

Supplemental disclosure of cash flow
     information:
     Interest paid                       $       15.6  $        9.4  $          - 

</TABLE>

                                 SIGNATURES

          Pursuant to the requirements of Section 13 or 15 (d) of the
Securities Exchange Act of 1934, the Registrant has duly caused this report
to be signed on its behalf by the undersigned, thereunto duly authorized.

                                  MAXXAM GROUP HOLDINGS INC.

Date:  March 30, 1999         By:    /S/ PAUL N. SCHWARTZ
                                       Paul N. Schwartz
                                Vice President, Chief Financial
                                     Officer and Director
                                 (Principal Financial Officer)


          Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons on behalf
of the Registrant and in the capacities and on the dates indicated.

Date:  March 30, 1999         By:   /S/ CHARLES E. HURWITZ      
                                      Charles E. Hurwitz
                               Chairman of the Board, President,
                                  Chief Executive Officer and
                                           Director


Date:  March 30, 1999         By:    /S/ PAUL N. SCHWARTZ       
                                       Paul N. Schwartz
                                Vice President, Chief Financial
                                     Officer and Director
                                 (Principal Financial Officer)


Date:  March 30, 1999         By:     /S/ JOHN T. LA DUC        
                                        John T. La Duc
                                  Vice President and Director


Date:  March  30, 1999        By:  /S/ ELIZABETH D. BRUMLEY
                                     Elizabeth D. Brumley
                                          Controller
                                (Principal Accounting Officer)



<TABLE>
<CAPTION>


                                                         INDEX OF EXHIBITS

      EXHIBIT
       NUMBER                                                           DESCRIPTION                                               
- -------------------      ---------------------------------------------------------------------------------------------------------
<S>                      <C>
        3.1              Certificate of Incorporation of MAXXAM Group Holdings Inc. (the "Company" or "MGHI") (incorporated herein
                         by reference to Exhibit 3.1 to the Company's Registration Statement on Form S-4, Registration No. 333-
                         18723)

       *3.2              Amended and Restated By-laws of the Company, adopted July 7, 1998

        4.1              Indenture, dated as of December 23, 1996 among the Company, as Issuer, MAXXAM Inc., as Guarantor, and
                         First Bank National Association, as Trustee ("MGHI Indenture"),  regarding the Company's 12% Senior
                         Secured Notes due 2003 (incorporated herein by reference to Exhibit 4.1 to the Company's Registration
                         Statement on Form S-4, Registration No. 333-18723)

        4.2              First Supplemental Indenture, dated as of July 8, 1998, to the MGHI Indenture (incorporated herein by
                         reference to Exhibit 4.4 to the Quarterly Report on Form 10-Q/A of the Company for the quarter ended
                         June 30, 1998; File No. 1-3924; the "MGHI June 1998 Form 10-Q/A")

        4.3              Second Supplemental Indenture, dated as of July 29, 1998, to the MGHI Indenture (incorporated herein by
                         reference to Exhibit 4.5 to the MGHI June 1998 Form 10-Q/A)

        4.4              Indenture, dated as of July 20, 1998, between Scotia Pacific Company LLC ("Scotia LLC") and State Street
                         Bank and Trust Company ("State Street") regarding Scotia LLC's Class A-1, Class A-2 and Class A-3 Timber
                         Collateralized Notes (incorporated herein by reference to Exhibit 4.1 to Scotia LLC's Registration
                         Statement on Form S-4, Registration No. 333-63825; the "Scotia LLC Registration Statement")

        4.5              Deed of Trust, Security Agreement, Financing Statement Fixture Filing and Assignment of Proceeds, dated
                         as of July 20, 1998, among Scotia LLC, Fidelity National Title Insurance Company, as trustee, and State
                         Street, as collateral agent (incorporated herein by reference to Exhibit 4.6 to the Scotia LLC
                         Registration Statement)

        4.6              Credit Agreement, dated as of July 20, 1998, among Scotia LLC, the financial institutions party thereto
                         and Bank of America National Trust and Savings Association, as agent (incorporated herein by reference to
                         Exhibit 4.3 to the Quarterly Report on Form 10-Q/A of MAXXAM Inc. for the quarter ended June 30, 1998;
                         File No. 1-3924; the "MAXXAM June 1998 Form 10-Q")

       *4.7              Amended and Restated Credit Agreement dated as of December 18, 1998 between The Pacific Lumber Company
                         ("Pacific Lumber") and Bank of America National Trust and Savings Association
                         Note:  Pursuant to Regulation Section 229.601, Item 601 (b)(4)(iii) of Regulation S-K, upon request of
                         the Securities and Exchange Commission, the Company hereby agrees to furnish a copy of any unfiled
                         instrument which defines the rights of holders of long-term debt of the Company and its consolidated
                         subsidiaries (and for any of its unconsolidated subsidiaries for which financial statements are required
                         to be filed) wherein the total amount of securities authorized thereunder does not exceed 10 percent of
                         the total consolidated assets of the Company

        10.1             Tax Allocation Agreement dated as of December 23, 1996 between MGHI and MAXXAM Inc. (incorporated herein
                         by reference to Exhibit 10.1 to the Company's Registration Statement on Form S-4, Registration No. 333-
                         8723)

        10.2             Tax Allocation Agreement between MAXXAM Group Inc. ("MGI") and MAXXAM Inc. dated as of August 4, 1993
                         (incorporated herein by reference to Exhibit 10.6 to the Amendment No. 3 to the Registration Statement on
                         Form S-2 of MGI, Registration No. 33-64042; the "MGI Registration Statement")

        10.3             Tax Allocation Agreement dated as of May 21, 1988 among MAXXAM Inc., MGI, Pacific Lumber and the
                         corporations signatory thereto (incorporated herein by reference to Exhibit 10.8 to Pacific Lumber's
                         Annual Report on Form 10-K for the fiscal year ended December 31, 1988, File No. 1-9204)

        10.4             Tax Allocation Agreement among Pacific Lumber, Scotia LLC, Salmon Creek Corporation and MAXXAM Inc. dated
                         as of March 23, 1993 (incorporated herein by reference to Exhibit 10.1 to Amendment No. 3 to the Form S-
                         1 Registration Statement of Scotia Pacific Holding Company, Registration No. 33-55538)

        10.5             Tax Allocation Agreement between MAXXAM Inc. and Britt Lumber Co., Inc. ("Britt"), dated as of July 3,
                         1990 (incorporated herein by reference to Exhibit 10.4 to the Company's Annual Report on Form 10-K for
                         the fiscal year ended December 31, 1993)

        10.6             Non-Negotiable Intercompany Note dated as of December 23, 1996 executed by MAXXAM Inc. in favor of the
                         Company (incorporated herein by reference to Exhibit 10.8 to the Company's Registration Statement on Form
                         S-4, Registration No. 333-18723)

        10.7             Power Purchase Agreement dated as of January 17, 1986 between Pacific Lumber and Pacific Gas and Electric
                         Company (incorporated herein by reference to Exhibit 10(n) to Pacific Lumber's Registration Statement on
                         Form S-1, Registration No. 33-5549)

        10.8             New Master Purchase Agreement, dated as of July 20, 1998, between Scotia LLC and Pacific Lumber
                         (incorporated herein by reference to Exhibit 10.1 to the Quarterly Report on Form 10-Q of the Company for
                         the quarter ended June 30, 1998; File No. 333-18723; the "MGHI June 1998 Form 10-Q")

        10.9             New Services Agreement, dated as of July 20, 1998, between Pacific Lumber and Scotia LLC (incorporated
                         herein by reference to Exhibit 10.2 to the MGHI June 1998 Form 10-Q)

        10.10            New Additional Services Agreement, dated as of July 20, 1998, between Scotia LLC and Pacific Lumber
                         (incorporated herein by reference to Exhibit 10.3 to the MGHI June 1998 Form 10-Q)

        10.11            New Reciprocal Rights Agreement, dated as of July 20, 1998, among Pacific Lumber, Scotia LLC and Salmon
                         Creek Corporation (incorporated herein by reference to Exhibit 10.4 to the MGHI June 1998 Form 10-Q)

        10.12            New Environmental Indemnification Agreement, dated as of July 20, 1998, between Pacific Lumber and Scotia
                         LLC (incorporated herein by reference to Exhibit 10.5 to the MGHI June 1998 Form 10-Q)

        10.13            Purchase and Services Agreement between Pacific Lumber and Britt Lumber Co., Inc. (incorporated herein by
                         reference to Exhibit 10.17 to Amendment No. 2 to the Form S-2 Registration Statement of Pacific Lumber;
                         Registration Statement No. 33-56332)

        10.14            Undertaking, dated as of August 4, 1993, executed by MAXXAM in favor of MGI (incorporated herein by
                         reference to Exhibit 10.24 to MGI's Annual Report on Form 10-K for the fiscal year ended December 31,
                         1994, File No. 1-8857)

        10.15            Agreement (the "Headwaters Agreement") dated as of September 28, 1996 among MAXXAM Inc., The Pacific
                         Lumber Company (on behalf of itself, its subsidiaries and its affiliates), the United States of America
                         and the State of California (incorporated herein by reference to Exhibit 10.1 to MAXXAM Inc.'s Form 8-K
                         dated September 28, 1996; File No. 1-3924)

        10.16            Implementation Agreement with Regard to Habitat Conservation Plan for the Properties of Pacific Lumber,
                         Scotia LLC and Salmon Creek Corporation ("Salmon Creek") dated  as of February 1999 by and among The
                         United States Fish and Wildlife Service, the National Marine Fisheries Service, the California Department
                         of Fish and Game ("CDF&G"), the California Department of Forestry and Fire Protection (the "CDF") and
                         Pacific Lumber, Salmon Creek and Scotia LLC (incorporated herein by reference to Exhibit 99.3 to Scotia
                         LLC's Form 8-K dated March 19, 1999; File No. 333-63825)

        10.17            Agreement Relating to Enforcement of AB 1986 dated as of February 25, 1999 by and among The California
                         Resources Agency, CDF&G, The California Department of Forestry, The California Wildlife Conservation
                         Board (the "CWCB"), Pacific Lumber, Salmon Creek and Scotia LLC (incorporated herein by reference to
                         Exhibit 99.4 to Scotia LLC s Form 8-K dated March 19, 1999; File No. 333-63825)

        10.18            Habitat Conservation Plan dated as of February 1999 for the Properties of Pacific Lumber, Scotia Pacific
                         Holding Company and Salmon Creek (incorporated herein by reference to Exhibit 99.5 to Scotia LLC's Form
                         8-K dated March 19, 1999; File No. 333-63825)

        10.19            Agreement for Transfer of Grizzly Creek and Escrow Instructions and Option Agreement dated as of February
                         26, 1999 by and between Pacific Lumber and the State of California acting by and through the CWCB Board
                         (incorporated herein by reference to Exhibit 99.6 to Scotia LLC's Form 8-K dated March 19, 1999; File No.
                         333-63825)

        10.20            Agreement for Transfer of Owl Creek and Escrow Instructions and Option Agreement dated as of February 26,
                         1999 by and between the Company and the State of California acting by and through the CWCB (incorporated
                         herein by reference to Exhibit 99.7 to Scotia LLC's Form 8-K dated March 19, 1999; File No. 333-63825)

        10.21            Letter dated February 25, 1999 from the CDF to Pacific Lumber (incorporated herein by reference to
                         Exhibit 99.8 to Scotia LLC's Form 8-K dated March 19, 1999; File No. 333-63825)

        10.22            Letter dated March 1, 1999 from the CDF to Pacific Lumber (incorporated herein by reference to Exhibit
                         99.9 to Scotia LLC's Form 8-K dated March 19, 1999, File No. 333-63825)

        10.23            Letter dated March 1, 1999 from the U.S. Department of the Interior Fish and Wildlife Service and the
                         U.S. Department of Commerce National Oceanic and Atmospheric Administration to Pacific Lumber, Salmon
                         Creek and the Company (incorporated herein by reference to Exhibit 99.10 to Scotia LLC's Form 8-K dated
                         March 19, 1999; File No. 333-63825)

        10.24            Escrow Agreement dated as of March 1, 1999 ("Escrow Agreement") among Pacific Lumber, Salmon Creek and
                         Citibank, N.A. (incorporated herein by reference to Exhibit 10.15 to Scotia LLC's Annual Report on Form
                         10-K for the fiscal year ended December 31, 1999; File No. 333-63825)

        10.25            Amendment to Escrow Agreement dated as of March 26, 1999 (incorporated herein by reference to Exhibit
                         10.16 to Scotia LLC's Annual Report on Form 10-K for the fiscal year ended December 31, 1999; File No.
                         333-63825)

       *27               Financial Data Schedule

       *99.1             The consolidated financial statements and notes thereto of MAXXAM Inc. for the fiscal year ended December
                         31, 1998

       *99.2             The financial statements and notes thereto of MAXXAM Group Inc. for the fiscal year ended December 31,
                         1998

       *99.3             The consolidated financial statements and notes thereto of Kaiser Aluminum Corporation for the fiscal
                         year ended December 31, 1998

<FN>
- --------------- 
* Included with this filing.

</TABLE>



                       AMENDED AND RESTATED BY-LAWS 
                                     OF
                         MAXXAM GROUP HOLDINGS INC.
                          (a Delaware corporation)

                              _______________

                                 ARTICLE I

                                STOCKHOLDERS


          1.   CERTIFICATES REPRESENTING STOCK.  Certificates representing
stock in the corporation shall be signed by, or in the name of, the
corporation by the Chairman or Vice Chairman of the Board of Directors, if
any, or by the President or a Vice President and by the Treasurer or an
Assistant Treasurer or the Secretary or an Assistant Secretary of the
corporation.  Any or all of the signatures on any such certificate may be a
facsimile.  In case any officer, transfer agent, or registrar who has
signed or whose facsimile signature has been placed upon a certificate
shall have ceased to be such officer, transfer agent or registrar before
such certificate is issued, it may be issued by the corporation with the
same effect as if he were such officer, transfer agent or registrar at the
date of issue.

          Whenever the corporation shall be authorized to issue more than
one class of stock or more than one series of any class of stock, and
whenever the corporation shall issue any shares of its stock as partly paid
stock, the certificates representing shares of any such class or series or
of any such partly paid stock shall set forth thereon the statements
prescribed by the General Corporation Law of the State of Delaware (the
"General Corporation Law").  Any restrictions on the transfer or
registration of transfer of any shares of stock of any class or series
shall be noted conspicuously on the certificate representing such shares.

          The corporation may issue a new certificate of stock or
uncertificated shares in place of any certificate theretofore issued by it,
alleged to have been lost, stolen or destroyed, and the Board of Directors
may require the owner of the lost, stolen or destroyed certificate, or his
legal representative, to give the corporation a bond sufficient to
indemnify the corporation against any claim that may be made against it on
account of the alleged loss, theft or destruction of any such certificate
or the issuance of any such new certificate or uncertificated shares.

          2.   UNCERTIFICATED SHARES.  Subject to any conditions imposed by
the General Corporation Law, the Board of Directors of the corporation may
provide by resolution or resolutions that some or all of any or all classes
or series of the stock of the corporation shall be uncertificated shares. 
Within a reasonable time after the issuance or transfer of any
uncertificated shares, the corporation shall send to the registered owner
thereof any written notice prescribed by the General Corporation Law.

          3.   FRACTIONAL SHARE INTERESTS.  The corporation may, but shall
not be required to, issue fractions of a share.  If the corporation does
not issue fractions of a share, it shall (1) arrange for the disposition of
fractional interests by those entitled thereto, (2) pay in cash the fair
value of fractions of a share as of the time when those entitled to receive
such fractions are determined, or (3) issue scrip or warrants in registered
form (either represented by a certificate or uncertificated) or bearer form
(represented by a certificate) which shall entitle the holder to receive a
full share upon surrender of such scrip or warrants aggregating a full
share.  A certificate for a fractional share or an uncertificated
fractional share shall, but scrip or warrants shall not unless otherwise
provided therein, entitle the holder to exercise voting rights, to receive
dividends thereon, and to participate in any of the assets of the
corporation in the event of liquidation.  The Board of Directors may cause
scrip or warrants to be issued subject to the conditions that they shall
become void if not exchanged for certificates representing the full shares
or uncertificated full shares before a specified date, or subject to the
conditions that the shares for which scrip or warrants are exchangeable may
be sold by the corporation and the proceeds thereof distributed to the
holders of scrip or warrants, or subject to any other conditions which the
Board of Directors may impose.

          4.   STOCK TRANSFERS.  Upon compliance with provisions
restricting the transfer or registration of transfer of shares of stock, if
any, transfers or registration of transfers of shares of stock of the
corporation shall be made only on the stock ledger of the corporation by
the registered holder thereof, or by his attorney thereunto authorized by
power of attorney duly executed and filed with the Secretary of the
corporation or with a transfer agent or a registrar, if any, and, in the
case of shares represented by certificates, on surrender of the certificate
or certificates for such shares of stock properly endorsed and the payment
of all taxes due thereon.

          5.   RECORD DATE FOR STOCKHOLDERS.  In order that the corporation
may determine the stockholders entitled to notice of or to vote at any
meeting of stockholders or any adjournment thereof, the Board of Directors
may fix a record date, which record date shall not precede the date upon
which the resolution fixing the record date is adopted by the Board of
Directors, and which record date shall not be more than sixty nor less than
ten days before the date of such meeting.  If no record date is fixed by
the Board of Directors, the record date for determining stockholders
entitled to notice of or to vote at a meeting of stockholders shall be at
the close of business on the day next preceding the day on which notice is
given, or, if notice is waived, at the close of business on the day next
preceding the day on which the meeting is held.  A determination of
stockholders of record entitled to notice of or to vote at a  meeting of
stockholders shall apply to any adjournment of the meeting; provided,
however, that the Board of Directors may fix a new record date for the
adjourned meeting.  In order that the corporation may determine the
stockholders entitled to consent to corporate action in writing without a
meeting, the Board of Directors may fix a record date, which record date
shall not precede the date upon which the resolution fixing the record 
date is adopted by the Board of Directors, and which date shall not be more
than ten days after the date upon which the resolution fixing the record
date is adopted by the Board of Directors.  If no record date has been
fixed by the Board of Directors, the record date for determining the
stockholders entitled to consent to corporate action in writing without a
meeting, when no prior action by the Board of Directors is required by the
General Corporation Law, shall be the first date on which a signed written
consent setting forth the action taken or proposed to be taken is delivered
to the corporation by delivery to its registered office in the State of
Delaware, its principal place of business, or an officer or agent of the
corporation having custody of the book in which proceedings of meetings of
stockholders are recorded.  Delivery made to the corporation's registered
office shall be by hand or by certified or registered mail, return receipt
requested.  If no record date has been fixed by the Board of Directors and
prior to action by the Board of Directors is required by the General
Corporation Law, the record date for determining stockholders entitled to
consent to corporate action in writing without a meeting shall be at the
close of business on the day on which the Board of Directors adopts the
resolution taking such prior action.  In order that the corporation may
determine the stockholders entitled to receive payment of any dividend or
other distribution or allotment of any rights or the stockholders entitled
to exercise any rights in respect of any change, conversion or exchange of
stock, or for the purpose of any other lawful action, the Board of
Directors may fix a record date, which record date shall not precede the
date upon which the resolution fixing the record date is adopted, and which
record date shall be not more than sixty (60) days prior to such action. 
If no record date is fixed, the record date for determining stockholders
for any such purpose shall be at the close of business on the day on which
the Board of Directors adopts the resolution relating thereto.

          6.   MEANING OF CERTAIN TERMS.  As used herein in respect of the
right to notice of a meeting of stockholders or a waiver thereof or to
participate or vote thereat or to consent or dissent in writing in lieu of
a meeting, as the case may be, the term "share" or "shares" or "share of
stock" or "shares of stock" or "stockholder" or "stockholders" refers to an
outstanding share or shares of stock and to a holder or holders of record
of outstanding shares of stock when the corporation is authorized to issue
only one class of shares of stock, and said reference is also intended to
include any outstanding share or shares of stock and any holder or holders
of record of outstanding shares of stock of any class upon which or upon
whom the certificate of incorporation confers such rights where there are
two or more classes or series of shares of stock or upon which or upon whom
the General Corporation Law confers such rights notwithstanding that the
certificate of incorporation may provide for more than one class or series
of shares of stock, one or more of which are limited or denied such rights
thereunder; provided, however, that no such right shall vest in the event
of an increase or a decrease in the authorized number of shares of stock of
any class or series which is otherwise denied voting rights under the
provisions of the certificate of incorporation, except as any provision of
law may otherwise require.

          7.   STOCKHOLDER MEETINGS

          TIME.  The annual meeting shall be held on the date and at the
time fixed, from time to time, by the directors, provided, that the first
annual meeting shall be held on a date within thirteen months after the
organization of the corporation, and each successive annual meeting shall
be held on a date within thirteen months after the date of the preceding
annual meeting.  A special meeting shall be held on the date and at the
time fixed by the directors.

          PLACE.  Annual meetings and special meetings shall be held at
such place, within or without the State of Delaware, as the directors may,
from time to time, fix.  Whenever the directors shall fail to fix such
place, the meeting shall be held at the registered office of the
corporation in the State of Delaware.

          CALL.  Annual meetings and special meetings may be called by the
directors or by any officer instructed by the directors to call the
meeting.

          NOTICE OR WAIVER OF NOTICE.  Written notice of all meetings shall
be given, stating the place, date, and hour of the meeting and stating the
place within the city or other municipality or community at which the list
of stockholders of the corporation may be examined.  The notice of an
annual meeting shall state that the meeting is called for the election of
directors and for the transaction of other business which may properly come
before the meeting, and shall (if any other action which could be taken at
a special meeting is to be taken at such annual meeting) state the purpose
or purposes.  The notice of a special meeting shall in all instances state
the purpose or purposes for which the meeting is called.  The notice of any
meeting shall also include, or be accompanied by, any additional
statements, information or documents prescribed by the General Corporation
Law.  Except as otherwise provided by the General Corporation Law, a copy
of the notice of any meeting shall be given, personally or by mail, not
less than ten (10) days nor more than sixty (60) days before the date of
the meeting, unless the lapse of the prescribed period of time shall have
been waived, and directed to each stockholder at his record address or at
such other address which he may have furnished by request in writing to the
Secretary of the corporation.  Notice by mail shall be deemed to be given
when deposited, with postage thereon prepaid, in the United States Mail. 
If a meeting is adjourned to another time, not more than thirty (30) days
hence, and/or to another place, and if an announcement of the adjourned
time and/or place is made at the meeting, it shall not be necessary to give
notice of the adjourned meeting unless the directors, after adjournment,
fix a new record date for the adjourned meeting.  Notice need not be given
to any stockholder who submits a written waiver of notice signed by him
before or after the time stated therein.  Attendance of a stockholder at a
meeting of stockholders shall constitute a waiver of notice of such
meeting, except when the stockholder attends the meeting for the express
purpose of objecting, at the beginning of the meeting, to the transaction
of any business because the meeting is not lawfully called or convened. 
Neither the business to be transacted at, nor the purpose of, any regular
or special meeting of the stockholders need be specified in any written
waiver of notice.

          STOCKHOLDER LIST.  The officer who has charge of the stock ledger
of the corporation shall prepare and make, at least ten (10) days before
every meeting of stockholders, a complete list of the stockholders,
arranged in alphabetical order, and showing the address of each stockholder
and the number of shares registered in the name of each stockholder.  Such
list shall be open to the examination of any stockholder, for any purpose
germane to the meeting, during ordinary business hours, for a period of at
least ten (10) days prior to the meeting, either at a place within the city
or other municipality or community where the meeting is to be held, which
place shall be specified in the notice of the meeting, or if not so
specified, at the place where the meeting is to be held.  The list shall
also be produced and kept at the time and place of the meeting during the
whole time thereof, and may be inspected by any stockholder who is present. 
The stock ledger shall be the only evidence as to who are the stockholders
entitled to examine the stock ledger, the list required by this section or
the books of the corporation, or to vote at any meeting of stockholders.

          CONDUCT OF MEETING.  Meetings of the stockholders shall be
presided over by one of the following officers in the order of seniority
and if present and acting--the Chairman of the Board, if any, the Vice
Chairman of the Board, if any, the President, a Vice President, or if none
of the foregoing is in office and present and acting, by a chairman to be
chosen by the stockholders.  The Secretary of the corporation, or in his
absence, an Assistant Secretary, shall act as secretary of every meeting,
but is neither the Secretary nor an Assistant Secretary is present the
Chairman of the meeting shall appoint a secretary of the meeting.

          PROXY REPRESENTATION.  Every stockholder may authorize another
person or persons to act for him by proxy in all matters in which a
stockholder is entitled to participate, whether by waiving notice of any
meeting, voting or participating at a meeting, or expressing consent or
dissent without a meeting.  Every proxy must be signed by the stockholder
or by his attorney-in-fact.  No proxy shall be voted or acted upon after
three (3) years from its date unless such proxy provides for a longer
period.  A duly executed proxy shall be irrevocable if it states that it is
irrevocable and, if, and only as long as, it is coupled with an interest
sufficient in law to support an irrevocable power.  A proxy may be made
irrevocable regardless of whether the interest with which it is coupled is
an interest in the stock itself or an interest in the corporation
generally. 

          INSPECTORS.  The directors, in advance of any meeting, may, but
need not, appoint one or more inspectors of election to act at the meeting
or any adjournment thereof.  If an inspector or inspectors are not
appointed, the person presiding at the meeting may, but need not, appoint
one or more inspectors.  In case any person who may be appointed as an
inspector fails to appear or act, the vacancy may be filled by appointment
made by the directors in advance of the meeting or at the meeting by the
person presiding thereat.  Each inspector, if any, before entering upon the
discharge of his duties, shall take and sign an oath faithfully to execute
the duties of inspectors at such meeting with strict impartiality and 
according to the best of his ability.  The inspectors, if any, shall
determine the number of shares of stock outstanding and the voting power of
each, the shares of stock represented at the meeting, the existence of a
quorum, the validity and effect of proxies, and shall receive votes,
ballots, or consents, hear and determine all challenges and questions
arising in connection with the right to vote, count and tabulate all votes,
ballots, or consents, determine the result, and do such acts as are proper
to conduct the election or vote with fairness to all stockholders.  On
request of the person presiding at the meeting, the inspector or
inspectors, if any, shall make a report in writing of any challenge,
question, or matter determined by him or them and execute a certificate of
any fact found by him or them.  Except as otherwise required by subsection
(e) of Section 231 of the General Corporation Law, the provisions of that
Section shall not apply to the corporation.

          QUORUM.  The holders of a majority of the outstanding shares of
stock shall constitute a quorum at a meeting of stockholders for the
transaction of any business.  The stockholders present may adjourn the
meeting despite the absence of a quorum.

          VOTING.  Each share of stock shall entitle the holders thereof to
one vote.  Directors shall be elected by a plurality of the votes of the
shares present in person or represented by proxy at the meeting and
entitled to vote on the election of directors. Any other action shall be
authorized by a majority of the votes cast except where the General
Corporation Law prescribes a different percentage of votes and/or a
different exercise of voting power, and except as may be otherwise
prescribed by the provisions of the certificate of incorporation and these
By-Laws. In the election of directors, and for any other action, voting
need not be by ballot.

          8.   STOCKHOLDER ACTION WITHOUT MEETINGS.  Any action required by
the General Corporation Law to be taken at any annual or special meeting of
stockholders, or any action which may be taken at any annual or special
meeting of stockholders, may be taken without a meeting, without prior
notice and without a vote, if a consent in writing, setting forth the
action so taken, shall be signed by the holders of outstanding stock having
not less than the minimum number of votes that would be necessary to
authorize or take such action at a meeting at which all shares entitled to
vote thereon were present and voted. Prompt notice of the taking of the
corporate action without a meeting by less than unanimous written consent
shall be given to those stockholders who have not consented in writing.
Action taken pursuant to this paragraph shall be subject to the provisions
of Section 228 of the General Corporation Law.

                                 ARTICLE II

                                 DIRECTORS


          1.   FUNCTIONS AND DEFINITION.  The business and affairs of the
corporation shall be managed by or under the direction of the Board of
Directors of the corporation.  The Board of Directors shall have the
authority to fix the compensation of the members thereof.  The use of the
phrase "whole board" herein refers to the total number of directors which
the corporation would have if there were no vacancies.

          2.   QUALIFICATIONS AND NUMBER.  A director need not be a
stockholder, a citizen of the United States, or a resident of the State of
Delaware.  The initial Board of Directors shall consist of three (3)
persons.  Thereafter the number of directors constituting the whole board
shall be at least one (1).  Subject to the foregoing limitation and except
for the first Board of Directors, such number may be fixed from time to
time by action of the stockholders or of the directors, or, if the number
is not fixed, the number shall be at least one (1).  The number of
directors may be increased or decreased by action of the stockholders or of
the directors.

          3.   ELECTION AND TERM.  The first Board of Directors, unless the
members thereof shall have been named in the certificate of incorporation,
shall be elected by the incorporator or incorporators and shall hold office
until the first annual meeting of stockholders and until their successors
are elected and qualified or until their earlier resignation or removal. 
Any director may resign at any time upon written notice to the corporation. 
Thereafter, directors who are elected at an annual meeting of stockholders,
and directors who are elected in the interim to fill vacancies and newly
created directorships, shall hold office until the next annual meeting of
stockholders and until their successors are elected and qualified or until
their earlier resignation or removal.  Except as the General Corporation
Law may otherwise require, in the interim between annual meetings of
stockholders or of special meetings of stockholders called for the election
of directors and/or for the removal of one or more directors and for the
filling of any vacancy in that connection, newly created directorships and
any vacancies in the Board of Directors, including unfilled vacancies
resulting from the removal of directors for cause or without cause, may be
filled by the vote of a majority of the remaining directors then in office,
although less than a quorum, or by the sole remaining director.

          4.   MEETINGS.

          TIME.  Meetings shall be held at such time as the Board shall
fix, except that the first meeting of a newly elected Board shall be held
as soon after its election as the directors may conveniently assemble.

          PLACE.  Meetings shall be held at such place within or without
the State of Delaware as shall be fixed by the Board.

          CALL.  No call shall be required for regular meetings for which
the time and place have been fixed.  Special meetings may be called by or
at the direction of the Chairman of the Board, if any, of the Vice Chairman
of the Board, if any, of the President, or of a majority of the directors
in office.

          NOTICE OR ACTUAL OR CONSTRUCTIVE WAIVER.  No notice shall be
required for regular meetings for which the time and place have been fixed. 
Written, oral, or any other mode of notice of the time and place shall be
given for special meetings in sufficient time for the convenient assembly
of the directors thereat.  Notice need not be given to any director or to
any member of a committee of directors who submits a written waiver of
notice signed by him before or after the time stated therein. Attendance of
any such person at a meeting shall constitute a waiver of notice of such
meeting, except when he attends a meeting for the express purpose of
objecting, at the beginning of the meeting, to the transaction of any
business because the meeting is not lawfully called or convened.  Neither
the business to be transacted at, nor the purpose of, any regular or
special meeting of the directors need be specified in any written waiver of
notice.

          QUORUM AND ACTION.  A majority of the whole Board shall
constitute a quorum except when a vacancy or vacancies prevents such
majority, whereupon a majority of the directors in office shall constitute
a quorum, provided, that such majority shall constitute at least one-third
of the whole Board.  A majority of the directors present, whether or not a
quorum is present, may adjourn a meeting to another time and place.  Except
as herein otherwise provided, and except as otherwise provided by the
General Corporation Law, the vote of the majority of the directors present
at a meeting at which a quorum is present shall be the act of the Board. 
The quorum and voting provisions herein stated shall not be construed as
conflicting with any provisions of the General Corporation Law and these
By-Laws which govern a meeting of directors held to fill vacancies and
newly created directorships in the Board or action of disinterested
directors.

          Any member or members of the Board of Directors or of any
committee designated by the Board, may participate in a meeting of the
Board, or any such committee, as the case may be, by means of conference
telephone or similar communications equipment by means of which all persons
participating in the meeting can hear each other.

          CHAIRMAN OF THE MEETING.  The Chairman of the Board, if any and
if present and acting, shall preside at all meetings. Otherwise, the Vice
Chairman of the Board, if any and if present and acting, or the President,
if present and acting, or any other director chosen by the Board, shall
preside.

          5.   REMOVAL OF DIRECTORS.  Except as may otherwise be provided
by the General Corporation Law, any director or the entire Board of
Directors may be removed, with or without cause, by the holders of a
majority of the shares then entitled to vote at an election of directors.

          6.   COMMITTEES.  The Board of Directors may, by resolution
passed by a majority of the whole Board, designate one or more committees,
each committee to consist of one or more of the directors of the
corporation.  The Board may designate one or more directors as alternate
members of any committee, who may replace any absent or disqualified member
at any meeting of the committee.  In the absence or disqualification of any
member of any such committee or committees, the member or members thereof
present at any meeting and not disqualified from voting, whether or not he
or they constitute a quorum, may unanimously appoint another member of the
Board of Directors to act at the meeting in the place of any such absent or
disqualified member.  Any such committee, to the extent provided in the
resolution of the Board, shall have and may exercise the powers and
authority of the Board of Directors in the management of the business and
affairs of the corporation with the exception of any authority the
delegation of which is prohibited by Section 141 of the General Corporation
Law, and may authorize the seal of the corporation to be affixed to all
papers which may require it.

          7.   WRITTEN ACTION.  Any action required or permitted to be
taken at any meeting of the Board of Directors or any committee thereof may
be taken without a meeting if all members of the Board or committee, as the
case may be, consent thereto in writing, and the writing or writings are
filed with the minutes of proceedings of the Board or committee.

                                ARTICLE III

                                  OFFICERS

          The officers of the corporation shall consist of such officers as
may be appointed by the Board of Directors from time to time, including but
not limited to a President, a Secretary, and, if deemed necessary,
expedient, or desirable by the Board of Directors, a Chairman of the Board,
a Vice Chairman of the Board, an Executive Vice President, one or more
other Vice Presidents, a Treasurer, one or more Assistant Secretaries, one
or more Assistant Treasurers, and such other officers with such titles as
the resolution of the Board of Directors choosing them shall designate. 
Except as may otherwise be provided in the resolution of the Board of
Directors choosing him, no officer, other than the Chairman or Vice
Chairman of the Board, if any, need be a director.  Any number of offices
may be held by the same person, as the directors may determine.

          Unless otherwise provided in the resolution choosing him, each
officer shall be chosen for a term which shall continue until the meeting
of the Board of Directors following the next annual meeting of stockholders
and until his successor shall have been chosen and qualified.

          All officers of the corporation shall have such authority and
perform such duties in the management and operation of the corporation as
shall be prescribed in the resolutions of the Board of Directors
designating and choosing such officers and prescribing their authority and
duties, and shall have such additional authority and duties as are incident
to their office except to the extent that such resolutions may be
inconsistent therewith.  The Secretary or an Assistant Secretary of the
corporation shall record all of the proceedings of all meetings and actions
in writing of stockholders, directors, and committees of directors, and
shall exercise such additional authority and perform such additional duties
as the Board shall assign to him. Any officer may be removed, with or
without cause, by the Board of Directors. Any vacancy in any office may be
filled by the Board of Directors.

                                 ARTICLE IV
                       INDEMNIFICATION OF DIRECTORS,
                       OFFICERS, EMPLOYEES AND AGENTS

          1.   INDEMNIFICATION.  The corporation shall indemnify, to the
fullest extent authorized by the General Corporation Law, as the same exist
or may hereafter be amended (but, in the case of any such amendment, only
to the extent that such amendment permits the corporation to provide
greater or broader indemnification rights than such law permitted the
corporation to provide prior to such amendment), any person who was or is a
part or is threatened to be made a party to any threatened, pending or
completed action, suit, or proceeding, whether civil, criminal,
administrative, or investigative (other than an action by or in the right
of the corporation) by reason of the fact that he is or was a director,
officer, employee, or agent of the corporation, or is or was serving at the
written request of the corporation as a director, officer, employee, or
agent of another corporation, partnership, joint venture, trust, or other
enterprise ( Proceeding ), against expenses (including attorneys  fees),
judgments, fines, and amounts actually and reasonably incurred by him in
connection with the Proceeding. 

          2.   ADVANCEMENT OF EXPENSES.  Reasonable expenses (including
attorneys  fees) incurred in defending a civil or criminal action, suit, or
proceeding described in the immediately preceding paragraph may be paid by
the corporation in advance of the final disposition of such action, suit,
or proceeding.

          3.   OTHER RIGHTS AND REMEDIES.  The indemnification and
advancement of expenses provided by, or granted pursuant to, this Article V
shall not be deemed exclusive of any other rights to which those seeking
indemnification or advancement of expenses may be entitled under any
statute, by-law, agreement, vote of stockholders or disinterested
directors, or otherwise, both as to actions in their official capacity and
as to actions in another capacity while holding such office, and shall
continue as to a person who has ceased to be a director, officer, employee,
or agent and shall inure to the benefit of the heirs, executors, and
administrators of such a person.

          4.   INSURANCE.  The corporation may purchase and maintain
insurance on behalf of any person who is or was a director, officer,
employee, or agent of the corporation, or is or was serving at the written
request of the corporation as a director, officer, employee, or agent of
another corporation, partnership, joint venture, trust, or other
enterprise, against any liability asserted against him and incurred by him
in any such capacity, or arising out of his status as such, whether or not
the corporation would have the power or would be required to indemnify him
against such liability under the provisions of this Article IV.

                                 ARTICLE V

                               CORPORATE SEAL

          The corporate seal shall be in such form as the Board of
Directors shall prescribe.

                                 ARTICLE VI

                                FISCAL YEAR

          The fiscal year of the corporation shall be fixed, and shall be
subject to change, by the Board of Directors.

                                ARTICLE VII

                            CONTROL OVER BY-LAWS

          Subject to the provisions of the certificate of incorporation and
the provisions of the General Corporation Law, the power to amend, alter,
or repeal these By-laws and to adopt new By-Laws may be exercised by the
Board of Directors or by the stockholders.



                   AMENDED AND RESTATED CREDIT AGREEMENT

                       DATED AS OF DECEMBER 18, 1998

                                  BETWEEN

                         THE PACIFIC LUMBER COMPANY

                                    AND

           BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION



                             TABLE OF CONTENTS

Section                                                               Page

ARTICLE I DEFINITIONS                                                 1
     1.01 Certain Defined Terms                                       1
     1.02 Other Interpretive Provisions                               25
     1.03 Accounting Principles                                       26
ARTICLE II THE CREDITS                                                26
     2.01 The Term Credit and the Revolving Credit                    26
          (a)  The Term Credit                                        26
          (b)  The Revolving Credit                                   27
          (c)  Reborrowing                                            27
          (d)  Obligations under the Prior Credit Agreement           27
     2.02 Loan Accounts                                               27
     2.03 Procedure for Borrowing                                     27
     2.04 Conversion and Continuation Elections                       28
     2.05 Voluntary Termination or Reduction of Commitment            29
     2.06 Optional Prepayments                                        29
     2.07 Mandatory Prepayments of Loans                              30
          (a)  Mandatory Prepayments, Cash Collateral                 30
          (b)  Aggregate Annual Excess Cash Flow Recapture            30
          (c)  Clean-up Period                                        30
          (d)  General                                                30
     2.08 Scheduled Repayment                                         30
          (a)  The Term Credit                                        30
          (b)  The Revolving Credit                                   31
     2.09 Interest                                                    31
     2.10 Fees                                                        32
          (a)  Commitment Fee                                         32
          (b)  Arrangement Fee                                        32
          (c)  Utilization Fees                                       32
     2.11 Computation of Fees and Interest                            32
     2.12 Payments by the Company                                     33
     2.13 Security                                                    33
     2.14 The Letter of Credit Subfacility                            34
     2.15 Issuance, Amendment and Renewal of Letters of Credit        34
     2.16 Existing Letters of Credit; Drawings and Reimbursements     36
     2.17 Role of the Bank                                            36
     2.18 Obligations Absolute                                        37
     2.19 Cash Collateral Pledge                                      38
     2.20 Letter of Credit Fees                                       38
     2.21 Uniform Customs and Practice                                38
ARTICLE III TAXES, YIELD PROTECTION AND ILLEGALITY                    39
     3.01 Taxes                                                       39
     3.02 Illegality                                                  40
     3.03 Increased Costs and Reduction of Return                     40
     3.04 Funding Losses                                              41
     3.05 Inability to Determine Rates                                41
     3.06 Reserves on Offshore Rate Loans                             42
     3.07 Survival                                                    42
ARTICLE IV CONDITIONS PRECEDENT                                       42
     4.01 Conditions of Initial Loans                                 42
          (a)  Credit Agreement                                       42
          (b)  Company Security Agreement                             42
          (c)  Evidence of Filings                                    42
          (d)  Resolutions; Incumbency                                43
          (e)  Legal Opinion                                          43
          (f)  Payment of Fees                                        43
          (g)  Certificate                                            43
     4.02 Conditions to All Loans and Letters of Credit               43
          (a)  Notice of Borrowing or Conversion/Continuation;
               Letter of Credit Application                           43
          (b)  Continuation of Representations and Warranties         44
          (c)  No Existing Default                                    44
          (d)  No Future Advance Notice                               44
          (e)  Other Documents                                        44
     4.03 Conditions to Each Term Loan                                44
          (a)  Deeds of Trust                                         44
ARTICLE V REPRESENTATIONS AND WARRANTIES                              45
     5.01 Corporate Existence and Power                               45
     5.02 Corporate Authorization; No Contravention                   45
     5.03 Governmental Authorization                                  45
     5.04 Binding Effect                                              46
     5.05 Litigation                                                  46
     5.06 No Default                                                  46
     5.07 ERISA Compliance                                            46
     5.08 Use of Proceeds; Margin Regulations                         47
     5.09 Title to Properties                                         47
     5.10 Taxes                                                       47
     5.11 Financial Condition                                         48
     5.12 Environmental Matters                                       48
     5.13 Collateral Documents                                        49
     5.14 Regulated Entities                                          49
     5.15 No Burdensome Restrictions                                  50
     5.16 Subsidiaries                                                50
     5.17 Insurance                                                   50
     5.18 Solvency                                                    50
     5.19 Swap Obligations                                            50
     5.20 Full Disclosure                                             50
     5.21 Labor Relations                                             51
     5.22 Compliance with Laws                                        51
     5.23 Merchantable Inventory                                      51
     5.24 Location of the Company                                     51
     5.25 Y2K                                                         51
ARTICLE VI AFFIRMATIVE COVENANTS                                      52
     6.01 Financial Statements                                        52
     6.02 Certificates; Other Information                             53
     6.03 Notices                                                     54
     6.04 Preservation of Corporate Existence, Etc.                   55
     6.05 Maintenance of Property                                     56
     6.06 Insurance                                                   56
     6.07 Payment of Obligations                                      57
     6.08 Compliance with Laws                                        57
     6.09 Compliance with ERISA                                       57
     6.10 Inspection of Property and Books and Records                57
     6.11 Environmental Laws                                          58
     6.12 Use of Proceeds                                             58
     6.13 Solvency                                                    58
     6.14 Protection of Collateral; Access                            58
     6.15 Further Assurances                                          58
ARTICLE VII NEGATIVE COVENANTS                                        60
     7.01 Limitation on Liens                                         60
     7.02 Disposition of Assets                                       62
     7.03 Consolidations and Mergers                                  63
     7.04 Loans and Investments                                       63
     7.05 Limitation on Indebtedness                                  64
     7.06 Transactions with Affiliates                                65
     7.07 Use of Proceeds                                             65
     7.08 Contingent Obligations                                      66
     7.09 Joint Ventures                                              66
     7.10 ERISA                                                       66
     7.11 Lease Obligations                                           66
     7.12 Restricted Payments                                         67
     7.13 Change in Business                                          68
     7.14 Accounting Changes                                          68
     7.15 Other Contracts                                             68
ARTICLE VIII EVENTS OF DEFAULT                                        69
     8.01 Event of Default                                            69
          (a)  Non-Payment                                            69
          (b)  Representation or Warranty                             69
          (c)  Other Defaults                                         69
          (d)  Cross-Default                                          69
          (e)  Insolvency; Voluntary Proceedings                      70
          (f)  Involuntary Proceedings                                70
          (g)  ERISA                                                  70
          (h)  Monetary Judgments                                     70
          (i)  Non-Monetary Judgments                                 71
          (j)  Change in Control                                      71
          (k)  Collateral                                             71
          (l)  Condemnation                                           72
          (m)  Regulatory Action                                      72
     8.02 Remedies                                                    72
     8.03 Specified Swap Contract Remedies                            72
     8.04 Rights Not Exclusive                                        73
     8.05 Certain Financial Covenant Defaults                         73
ARTICLE IX MISCELLANEOUS                                              73
     9.01 Amendments and Waivers                                      73
     9.02 Notices                                                     73
     9.03 No Waiver; Cumulative Remedies                              74
     9.04 Costs and Expenses                                          74
     9.05 Company Indemnification                                     75
     9.06 Marshalling; Payments Set Aside                             77
     9.07 Successors and Assigns                                      77
     9.08 Assignments, Participations, etc.                           77
     9.09 Confidentiality                                             78
     9.10 Set-off                                                     79
     9.11 Counterparts                                                79
     9.12 Severability; Conflicting Provisions                        79
          (a)  Severability                                           79
          (b)  Conflicting Provisions                                 79
     9.13 No Third Parties Benefited                                  79
     9.14 Governing Law and Jurisdiction                              80
     9.15 Verification of Receivables                                 80
     9.16 Termination of Commitment to Lend under the Prior
               Credit Agreement                                       80

SCHEDULES

Schedule 5.05  Litigation
Schedule 5.07  ERISA
Schedule 5.12  Environmental Matters
Schedule 5.16  Subsidiaries and Minority Interests
Schedule 7.01  Permitted Liens
Schedule 7.05  Permitted Indebtedness
Schedule 7.08  Contingent Obligations


EXHIBITS

Exhibit A      Form of Notice of Borrowing
Exhibit B      Form of Notice of Conversion/Continuation
Exhibit C      Form of Compliance Certificate


                   AMENDED AND RESTATED CREDIT AGREEMENT

          This AMENDED AND RESTATED CREDIT AGREEMENT is entered into as of
December 18, 1998 between The Pacific Lumber Company (the "Company") and
Bank of America National Trust and Savings Association (the "Bank").

          WHEREAS, the Company and the Bank entered into an Amended and
Restated Credit Agreement dated as of November 10, 1995 (as amended by the
First Amendment thereto dated as of February 10, 1997, and the Second
Amendment thereto dated as of October 2, 1997, the "Prior Credit
Agreement");

          WHEREAS, the Bank and the Company wish to further amend the
Credit Agreement by providing, among other matters, for a $60,000,000
credit facility to be allocated between a revolving facility and a term
loan facility;

          NOW, THEREFORE, the Company and the Bank agree that the Prior
Credit Agreement is hereby amended and restated in its entirety as set
forth in this Agreement and the Company and the Bank agree as follows:

                                 ARTICLE I

                                DEFINITIONS

     1.01 Certain Defined Terms.

          The following terms have the following meanings:

          "Acceptable Inventory" means inventory (as defined in the UCC)
which:

     (a)  Is owned by the Company free and clear of all security interests,
liens, encumbrances, and rights of others, except the security interest in
favor of the Bank;

     (b)  Is located at permanent locations acceptable to the Bank and is
not covered by a negotiable document of title unless such document has been
delivered to the Bank;

     (c)  In the Bank's reasonable opinion, is not obsolete, unsalable,
damaged, or unfit for further processing;

     (d)  Is not placed by the Company on consignment;

     (e)  Consists of wood chips, lumber, or log inventory or, if the Bank
approves in writing in advance in its sole discretion, consists of gravel
or block inventory and, in any case, is of a type held for sale in the
Company's ordinary course of business; and

     (f)  Is otherwise acceptable to the Bank in the exercise of its
reasonable judgment.

The value of Acceptable Inventory shall be the lesser of the Company's cost
(determined under GAAP) or the Bank's independent determination of the
resale value of such inventory in such quantities and on such terms as the
Bank may reasonably deem appropriate.  Until further written notice from
the Bank to the Company, the Bank agrees that the value (y) of the lumber
component of Acceptable Inventory shall be determined by the resale value
of such inventory in such quantities and on such terms as the Bank may
reasonably deem appropriate and  (z) of the log component of such
Acceptable Inventory shall be determined by the Company's cost (determined
under GAAP) of such inventory.

          "Acceptable Receivable" means an Account:

     (a)  Arising from the sale of inventory or power produced by the
Company's cogeneration plant in Scotia, California, by the Company in its
ordinary course of business; and if arising from the sale of inventory, is
in an amount equal to or less than $2,000,000.  The Bank may, from time to
time, exempt specific Accounts from this $2,000,000 limit;

     (b)  Upon which the Company's right to receive payment is absolute and
not contingent upon the fulfillment of any condition whatever;

     (c)  Against which is asserted no defense, counterclaim or setoff,
whether well-founded or otherwise;

     (d)  That is a true and correct statement of a bona fide indebtedness
incurred in the amount of the Account for merchandise sold and accepted by
the Receivable Debtor obligated upon such Account;

     (e)  With respect to which an invoice has been sent;

     (f)  That is owned by the Company and not subject to any right, claim,
or interest of another other than the security interest in favor of the
Bank;

     (g)  That does not arise from a sale to an employee, Affiliate,
parent, or Subsidiary of the Company, or an entity which has common
officers or directors with the Company; except that up to 20% of the total
balance of Acceptable Receivables may include Accounts on which the
Receivable Debtor is Britt Lumber Co., Inc.;

     (h)  That is not the obligation of a Receivable Debtor that is the
federal government or a political subdivision thereof unless the Bank has
agreed to the contrary in writing and the Company has complied with the
Federal Assignment of Claims Act of 1940 with respect to such obligation;

     (i)  That is not the obligation of a Receivable Debtor that is any
state of the United States or any city, town, municipality or division
thereof; except for Accounts up to an aggregate outstanding amount at any
one time of $100,000 which arise in one of the following ways:

          (1)  The sale of power produced by the Company's cogeneration
     plant in Scotia, California; or

          (2)  The sale of lumber to cities and towns;

     (j)  That is not the obligation of a Receivable Debtor located in a
foreign country;

     (k)  That is not the obligation of a Receivable Debtor to whom the
Company is or may become liable for goods sold or services rendered by the
Receivable Debtor to the Company except to the extent that it exceeds the
amount of the Company's obligation to such Receivable Debtor;

     (l)  That does not arise with respect to goods which are delivered on
a cash-on-delivery basis or placed on consignment, guaranteed sale or other
terms by reason of which the payment by the Receivable Debtor may be
conditional;

     (m)  That is not in default.  An Account shall be deemed in default
upon the occurrence of any of the following:

          (1)  The Account is not paid within the 60 day period starting on
     its invoice date.  This 60 day limitation shall not apply to an
     Account which is not paid within such period because payment is
     subject to the Company's "winter terms" previously approved by the
     Bank;

          (2)  Any Receivable Debtor obligated upon such Account suspends
     business, makes a general assignment for the benefit of creditors, or
     fails to pay its debts generally as they come due; or

          (3)  Any petition is filed by or against any Receivable Debtor
     obligated upon such Account under any bankruptcy law or any other law
     or laws for the relief of debtors;

     (n)  That does not arise from the sale or lease of goods which remain
in the Company's possession or under the Company's control; and

     (o)  That is otherwise acceptable to Bank.

          "Account" means any right to the payment of money owned by the
Company and arising out of the sale of goods or the rendering of services
by the Company which is not evidenced by an instrument or chattel paper.

          "Acquisition" means any transaction or series of related
transactions for the purpose of or resulting, directly or indirectly, in
(a) the acquisition of all or substantially all of the assets of a Person,
or of any business or division of a Person, (b) the acquisition of in
excess of 50% of the capital stock, partnership interests, membership
interests or equity of any Person, or otherwise causing any Person to
become a Subsidiary, or (c) a merger or consolidation or any other
combination with another Person (other than a Person that is a Restricted
Subsidiary) provided that the Company or the Restricted Subsidiary is the
surviving entity.

          "Acquisition Cost" of standing timber, timber rights, or
timberlands means the aggregate of cash, checks or other cash equivalent
financial instruments paid and to be paid by the Company as the acquisition
price of standing timber, timber rights, or timberlands being acquired,
including sale, use or other transaction taxes paid or payable by the
Company and amounts required to be applied to repay principal, interest and
prepayment premiums and penalties on Indebtedness secured by a Lien (other
than that arising from a Collateral Document) on such standing timber,
timber rights, or timberlands.

          "Affiliate" means, as to any Person, any other Person which,
directly or indirectly, is in control of, is controlled by, or is under
common control with, such Person. A Person shall be deemed to control
another Person if the controlling Person possesses, directly or indirectly,
the power to direct or cause the direction of the management and policies
of the other Person, whether through the ownership of voting securities, by
contract or otherwise.  Except with respect to the Bank or any Affiliate
(defined without regard to this sentence) of the Bank, any director,
executive officer or beneficial owner of 10% or more of the equity of a
Person shall for the purposes of this Agreement, be deemed to control the
other Person.  

          "Agreement" means this Credit Agreement.

          "Applicable Margin" means, with respect to any Base Rate Loan or
Offshore Rate Loan, the per annum rates set forth opposite the Pricing
Level calculated for the periods described below.


<TABLE>
<CAPTION>

               Pricing Ratio
 Pricing       at End of
 Level         Fiscal Quarter                 Applicable Margin
 -----         --------------                 -----------------

                                           Offshore       Base Rate
                                          Rate Loans        Loans
                                          ----------        -----

 <S>           <C>                      <C>             <C>
 I             LESS THAN OR EQUAL TO        1.50%           0.50%
               1.00 TO 1.00

 II            GREATER THAN 1.00 TO         1.75%           0.75%
               1.00 BUT LESS THAN OR
               EQUAL TO 2.00 TO 1.00

 III           GREATER THAN 2.00 TO         2.00%           1.00%
               1.00 BUT LESS THAN OR
               EQUAL TO 3.00 TO 1.00

 IV.           GREATER THAN 3.00 TO         2.25%           1.25%
               1.00 BUT LESS THAN OR
               EQUAL TO 4.00 TO 1.00
 V.            GREATER THAN 4.00 TO         2.50%           1.50%
               1.00



</TABLE>
[/CAPTION]



          Where,

          "Pricing Level" means, for each Pricing Period, the pricing level
set forth opposite the Pricing Ratio set forth in the Compliance
Certificate most recently delivered to the Agent pursuant to Section 6.02.

          "Pricing Level Change Date" means the date three Business Days
after the delivery to the Agent of the financial reports and Compliance
Certificate delivered pursuant to Sections 6.01 and 6.02 for the fiscal
quarter ending December 31, 1998, and three days after delivery to the
Agent of such financial reports and Compliance Certificate for each fiscal
quarter thereafter.

          "Pricing Period" means each period commencing on each Pricing
Level Change Date and ending the day prior to the next Pricing Level Change
Date.

          From the Closing Date until the first Pricing Level Change Date,
the Applicable Margin for any Offshore Rate Loan or Base Rate Loan shall
correspond to the rates per annum set forth above opposite Pricing Level V. 
The Applicable Margin shall be adjusted automatically as to all Loans then
outstanding (without regard to the timing of Interest Periods) on each
Pricing Level Change Date to correspond with the applicable Pricing Level. 
If the Company fails to deliver such financial reports and certificates to
the Agent for any fiscal quarter by the date required hereunder, then the
Applicable Margin for all Loans beginning three Business Days after such
date shall, until three Business Days after delivery of such financial
reports and certificates, be the next higher Applicable Margin as set forth
in the chart above immediately below the previously effective Applicable
Margin; thus, if the Applicable Margin had previously been 1.50% for
Offshore Rate Loans, a failure to deliver quarterly financials on a timely
basis would cause the Applicable Margin to be 1.75% until three Business
Days after such delivery.

          "Assignee" has the meaning specified in subsection 9.08(a).

          "Attorney Costs" means and includes all fees and disbursements of
any law firm or other external counsel, the allocated cost of internal
legal services and all disbursements of internal counsel.

          "Bank" means Bank of America National Trust and Savings
Association.  Unless the context otherwise clearly requires, (a) "Bank"
includes Bank of America National Trust and Savings Association in its
capacity as Swap Provider, and (b) references to Bank of America National
Trust and Savings Association as a "Bank" shall also include any of such
institution's Affiliates that may at any time of determination be Swap
Providers.

          "Bankruptcy Code" means the Federal Bankruptcy Reform Act of 1978
(11 U.S.C. Section 101, et seq.).

          "Base Rate" means, for any day, the higher of:  (a) 0.50% per
annum above the latest Federal Funds Rate; and (b) the rate of interest in
effect for such day as publicly announced from time to time by the Bank in
San Francisco, California, as its "reference rate."  (The "reference rate"
is a rate set by the Bank based upon various factors including the Bank's
costs and desired return, general economic conditions and other factors,
and is used as a reference point for pricing some loans, which may be
priced at, above, or below such announced rate.)  Any change in the
reference rate announced by the Bank shall take effect at the opening of
business on the day specified in the public announcement of such change.

          "Base Rate Loan" means a Loan that bears interest based on the
Base Rate.

          "Bear Stearns Investment Advisory Contract" means the investment
advisory contract between the Company and Bear, Stearns & Co., Inc. dated
as of October 5, 1993.

          "Borrowing Base" means:

     (a)  the sum of:

          (1)  80% of the balance due on Acceptable Receivables; plus

          (2)  60% of the value of Acceptable Inventory; plus

          (3)  50% of the Acquisition Cost of Timberlands;

     minus

     (b)  the aggregate of the Company's open payables for contracted
logging and hauling;

in each case as of the time of computation.

          "Borrowing Base Certificate" means a certificate, in form and
detail acceptable to the Bank, from the Company and signed by a Responsible
Officer of the Company, setting forth the computations which form the basis
for the Borrowing Base contained in the certificate.

          "Borrowing Date" means any date on which a Loan is disbursed.

          "Britt Lumber Agreement" means the agreement dated as of March
23, 1993, among the Company and Britt Lumber Co., Inc.

          "Business Day" means any day other than a Saturday, Sunday or
other day on which commercial banks in San Francisco, California are
authorized or required by law to close and, if the applicable Business Day
relates to any Offshore Rate Loan, means such a day on which dealings are
carried on in the applicable offshore dollar interbank market.

          "Capital Adequacy Regulation" means any guideline, request or
directive of any central bank or other Governmental Authority, or any other
law, rule or regulation, whether or not having the force of law, in each
case, regarding capital adequacy of any bank or of any corporation
controlling a bank.

          "Capital Lease" has the meaning specified in the definition of
Capital Lease Obligations.

          "Capital Lease Obligations" means all monetary obligations of the
Company or any of its Subsidiaries under any leasing or similar arrangement
which, in accordance with GAAP, is classified as a capital lease ("Capital
Lease").

          "Capital Stock" of any Person means any and all shares,
interests, rights to purchase, warrants, options, participations or other
equivalents of equity interests in (however designated) such Person,
including any Preferred Stock of such Person but excluding any Redeemable
Stock of such Person.

          "Cash Equivalents" means at any time (i) any evidence of any
obligation issued or directly and fully guaranteed or insured by the United
States or any agency or instrumentality thereof (provided, that the full
faith and credit of the United States is pledged in support thereof); (ii)
demand or time deposits with, and certificates of deposit or acceptances
issued by, any bank or trust company organized under the laws of the United
States or any State thereof (including the Bank) whose unsecured,
unguaranteed long-term debt obligations are rated "A" by Standard & Poor's
Corporation ("S&P") and "A2" by Moody's Investors Service, Inc. ("Moody's")
or higher, or whose unsecured, unguaranteed commercial paper obligations
are rated "A-2" by S&P and "P-2" by Moody's or higher; (iii) repurchase
agreements entered into with entities whose unsecured, unguaranteed
long-term debt obligations are rated "A" by S&P and "A2" by Moody's or
higher, or whose unsecured, unguaranteed commercial paper obligations are
rated "A-2" by S&P and "P-2" by Moody's or higher, pursuant to a written
agreement with respect to any obligation described in clauses (i), (ii) or
(iv) of this definition; (iv) commercial paper (including both
noninterest-bearing discount obligations and interest-bearing obligations
payable on demand or on a specified date not later than 180 days from the
date of acquisition thereof) and having a rating of "A-2" by S&P and "P-2"
by Moody's or higher; (v) direct obligations of any money market fund or
other similar investment company all of whose investments consist primarily
of obligations described in the foregoing clauses of this definition and
that is rated "AAm" by S&P and "Aam" by Moody's or higher; (vi) taxable
auction rate securities commonly known as "money market notes" that at the
time of purchase have been rated and the ratings for which (A) for direct
issues, must not be less than "P2" if rated by Moody's and not less than
"A2" if rated by S&P, or (B) for collateralized issues which follow the
asset coverage tests set forth in the Investment Company Act of 1940, as
amended, must have long-term ratings of at least "AAA" if rated by S&P and
"Aaa" if rated by Moody's; or (vii) any investments hereafter developed
which are substantially comparable to those described above.

          "CERCLA" means the Comprehensive Environmental Response,
Compensation, and Liability Act of 1980.

          "Change in Control" means the occurrence of any of the following
events:

     (a)  MAXXAM Inc. not being the sole beneficial owner, directly or
indirectly, of at least 51% of the total common equity of the Company.  For
purposes of this clause, a beneficial owner shall have the meaning ascribed
in Regulation 13d-3 of the Exchange Act as in effect on the date of this
Agreement.  The provisions of this clause shall not apply if MAXXAM Inc.
should not hold the requisite beneficial ownership interest because of
bankruptcy, reorganization, insolvency, or similar proceedings; or

     (b)  MAXXAM Inc., through direct representation or through persons
nominated by it, not controlling a majority of the Board of Directors of
the Company necessary to effectuate any actions by the Board of Directors
of the Company; or

     (c)  Any person or group directly or indirectly owning more than
MAXXAM Inc. of the total voting power entitled to vote generally in the
election of directors of the Company.  For purposes of this clause, person
or group shall have the meaning ascribed in Section 13(d)(3) of the
Exchange Act as in effect on the date of this Agreement; or

     (d)  Charles Hurwitz, members of his immediate family and trusts for
the benefit thereof (each such person, including Mr. Hurwitz and any
trustee of such trusts, a "Beneficiary") not having (other than by reason
of resolution of any litigation outstanding as of the date of this
Agreement or any similar litigation or the existence of a Lien but
including by reason of the foreclosure of or other realization upon a Lien)
direct or indirect sole beneficial ownership (as defined under Regulation
13d-3 of the Exchange Act as in effect on the date of this Agreement) of at
least the Minimum Percentage of the total equity of MAXXAM Inc. other than
as a result of new issuances of equity securities by MAXXAM Inc. to third
parties (other than to a third party who is not a Beneficiary and who
controls MAXXAM Inc.).  For purposes of this definition, "Minimum
Percentage" means the product of (x) the percentage of the total equity of
MAXXAM Inc. directly or indirectly beneficially owned by the Beneficiaries
as of the date of this Agreement times (y) 80%.

          "Closing Date" means the date on which all conditions precedent
set forth in Section 4.01 are satisfied or waived by the Bank (or, in the
case of subsection 4.01(d), waived by the Person entitled to receive such
payment).

          "Code" means the Internal Revenue Code of 1986, and regulations
promulgated thereunder.

          "Collateral" means all property and interests in property and
proceeds thereof now owned or hereafter acquired by the Company in or upon
which a Lien now or hereafter exists in favor of the Bank securing all or
part of the Obligations (except, with respect to Specified Swap Contracts,
as set forth in Section 2.13), whether under this Agreement or under any
other documents executed and delivered to the Bank.

          "Collateral Documents" means, collectively, (i) the Company
Security Agreement, the Deeds of Trust, and all other security agreements,
mortgages, deeds of trust, patent and trademark assignments, lease
assignments, guarantees and other similar agreements between the Company
and the Bank now or hereafter delivered to the Bank pursuant to or in
connection with the transactions contemplated hereby, granting Bank a Lien
on the Collateral and all financing statements (or comparable documents now
or hereafter filed in accordance with the UCC or comparable law) against
the Company as debtor in favor of the Bank as secured party, and (ii) any
amendments, supplements, modifications, renewals, replacements,
consolidations, substitutions and extensions of any of the foregoing.

          "Commitment" means $60,000,000.

          "Commitment Fee" has the meaning specified in Section 2.10(a).

          "Commitment Fee Percentage" means with respect to the Commitment,
the per annum rates set forth below opposite the Pricing Level calculated
for periods described below.  The terms "Pricing Level" and "Pricing Level
Change Date" shall have the meanings specified in the definition of
"Applicable Margin."


<TABLE>
<CAPTION>

             Pricing Ratio
 Pricing     at End of
 Level       Fiscal Quarter     Commitment Fee Percentage
 -----       --------------     -------------------------
 <S>         <C>                           <C>
 I           LESS THAN OR                  .40%
             EQUAL TO 1.00
             TO 1.00
 II          GREATER THAN                  .45%
             1.00 TO 1.00
             BUT LESS THAN
             OR EQUAL TO
             2.00 TO 1.00
 III         GREATER THAN                  .50%
             2.00 TO 1.00
             BUT LESS THAN
             OR EQUAL TO
             3.00 TO 1.00
 IV.         GREATER THAN                  .50%
             3.00 TO 1.00
             BUT LESS THAN
             OR EQUAL TO
             4.00 TO 1.00
V.           GREATER THAN                  .50%
             4.00 TO 1.00 


</TABLE>
[/CAPTION]

          From the Closing Date until the first Pricing Level Change Date,
the Commitment Fee Percentage shall correspond to the rates per annum set
forth above opposite Pricing Level V.  The Commitment Fee Percentage shall
be adjusted automatically on each Pricing Level Change Date to correspond
with the applicable Pricing Level.  If the Company fails to deliver such
financial reports and certificates to the Agent for any fiscal quarter by
the date required hereunder, then the Commitment Fee Percentage beginning
three Business Days after such date shall, until three Business Days after
delivery of such financial reports and certificates, be the next higher
Commitment Fee Percentage as set forth in the chart above immediately below
the previously effective Commitment Fee Percentage; thus, if the Commitment
Fee Percentage had previously been 0.40%, a failure to deliver quarterly
financials on a timely basis would cause the Commitment Fee Percentage to
be .45% until three Business Days after such delivery.

          "Company Security Agreement" means the Amended and Restated
Security Agreement (Receivables and Inventory) between the Bank and the
Company of even date herewith.

          "Compliance Certificate" means a certificate substantially in
form of Exhibit C.

          "Contingent Obligation" means, as to any Person, (a) any Guaranty
Obligation of that Person; and (b) any direct or indirect obligation or
liability, contingent or otherwise, of that Person, (i) in respect of any
letter of credit or similar instrument issued for the account of that
Person or as to which that Person is otherwise liable for reimbursement of
drawings, or (ii) in respect of any Swap Contract that is not entered into
in connection with a bona fide hedging operation that provides offsetting
benefits to such Person.  The amount of any Contingent Obligation shall
(subject, in the case of Guaranty Obligations, to the last sentence of the
definition of "Guaranty Obligation") be deemed equal to the maximum
reasonably anticipated liability in respect thereof, and shall, with
respect to item (b)(ii) of this definition, be marked to market on a
current basis, excluding any obligations pursuant to contracts with
Subsidiaries of the Company or with Britt Lumber Co., Inc.

          "Contractual Obligation" means, as to any Person, any provision
of any security issued by such Person or of any agreement, undertaking,
contract, indenture, mortgage, deed of trust or other instrument, document
or agreement to which such Person is a party or by which it or any of its
property is bound.

          "Conversion/Continuation Date" means any date on which, under
Section 2.04, the Company (a) converts Loans of one Type to another Type,
or (b) continues as Loans of the same Type, but with a new Interest Period,
Loans having Interest Periods expiring on such date.

          "Debt" means, at any date of determination, the sum of the
following, computed on an Unconsolidated Basis: all outstanding Loans plus
any other interest bearing Indebtedness, the face amount of undrawn letters
of credit, and any Guaranty Obligation on account of interest bearing
Indebtedness or undrawn letters of credit.

          "Deed of Trust" means any deed of trust, mortgage, leasehold
mortgage, assignment of rents or other document creating a Lien on
Timberlands or any interest in Timberlands in favor of the Bank.

          "Default" means any event or circumstance which, with the giving
of notice, the lapse of time, or both, would (if not cured or otherwise
remedied during such time) constitute an Event of Default.

          "Early Termination Date" with respect to a Specified Swap
Contract shall have the meaning specified in such contract.

          "EBITDA" means, for any fiscal period, the following, computed on
an Unconsolidated Basis for such period:  net income or loss (excluding
therefrom any net income or loss of SPC or any Unrestricted Subsidiary)
plus the sum of, without duplication, (a) income tax expense, (b) interest
expense, (c) depreciation, (d) depletion, (e) amortization of deferred
financing cost, and (f) non-recurring, non-cash charges.

          "Effective Amount" means (i) with respect to any Revolving Loans
and Term Loans on any date, the aggregate outstanding principal amount
thereof after giving effect to any Borrowings and prepayments or repayments
of Revolving Loans and Term Loans occurring on such date; and (ii) with
respect to any outstanding L/C Obligations on any date, the amount of such
L/C Obligations on such date after giving effect to any Issuances of
Letters of Credit occurring on such date and any other changes in the
aggregate amount of the L/C Obligations as of such date, including as a
result of any reimbursements of outstanding unpaid drawings under any
Letters of Credit or any reductions in the maximum amount available for
drawing under Letters of Credit taking effect on such date.

          "Environmental Claims" means all claims, however asserted, by any
Governmental Authority or by any other Person in good faith and upon a
reasonable basis alleging potential liability or responsibility for
violation of any Environmental Law or for release or injury to the
environment or threat to public health, personal injury (including
sickness, disease or death), property damage, natural resources damage, or
otherwise alleging liability or responsibility for damages (punitive or
otherwise), cleanup, removal, remedial or response costs, restitution,
civil or criminal penalties, injunctive relief, or other type of relief,
resulting from or based upon (a) the presence, placement, discharge,
emission or release (including intentional and unintentional, negligent and
non-negligent, sudden or non-sudden, accidental or non-accidental
placement, spills, leaks, discharges, emissions or releases) of any
Hazardous Material at, in, or from property, whether or not owned by the
Company, or (b) any other circumstances forming the basis of any violation,
or violation alleged in good faith and upon a reasonable basis, of any
Environmental Law.

          "Environmental Laws" means all federal, state or local laws,
statutes, common law duties, rules, regulations, ordinances and codes,
together with all administrative orders, directed duties, requests,
licenses, authorizations and permits of, and agreements with, any
Governmental Authorities, in each case relating to environmental, health,
safety and land use matters; including CERCLA, the Clean Air Act, the
Federal Water Pollution Control Act of 1972, the Solid Waste Disposal Act,
the Endangered Species Act (16 U.S.C. Section 1531 et seq.), the Migratory
Bird Treaty Act (16 U.S.C. 703 et seq.), the Forest and Rangeland Renewable
Resources Act of 1974, the National Forest Management Act of 1976, the
Federal Resource Conservation and Recovery Act, the Toxic Substances
Control Act, the Emergency Planning and Community Right-to-Know Act, the
California Hazardous Waste Control Law, the California Solid Waste
Management, Resource, Recovery and Recycling Act, the California Water Code
and the California Health and Safety Code, the Z'berg-Nejedly Forest
Practices Act of 1973 and the California Public Resources Code.

          "ERISA" means the Employee Retirement Income Security Act of
1974, and regulations promulgated thereunder.

          "ERISA Affiliate" means any trade or business (whether or not
incorporated) that is, or at any time within six years of the time in
question has been, under common control with the Company within the meaning
of Section 414(b) or (c) of the Code (and Sections 414(m) and (o) of the
Code for purposes of provisions relating to Section 412 of the Code).

          "ERISA Event" means (a) a Reportable Event with respect to a
Pension Plan; (b) a withdrawal by the Company or any ERISA Affiliate from a
Pension Plan subject to Section 4063 of ERISA during a plan year in which
it was a substantial employer (as defined in Section 4001(a)(2) of ERISA)
or a cessation of operations which is treated as such a withdrawal under
Section 4062(e) of ERISA; (c) a complete or partial withdrawal by the
Company or any ERISA Affiliate from a Multiemployer Plan or notification
that a Multiemployer Plan is in reorganization; (d) the treatment of a
Pension Plan amendment as a termination under Section 4041 or 4041A of
ERISA, or the filing of a notice of intent to terminate or the commencement
of proceedings by the PBGC to terminate a Pension Plan or Multiemployer
Plan; (e) an event or condition which might reasonably be expected to
constitute grounds under Section 4042 of ERISA for the termination of, or
the appointment of a trustee to administer, any Pension Plan or
Multiemployer Plan; or (f) the imposition of any liability under Title IV
of ERISA, other than PBGC premiums due but not delinquent under Section
4007 of ERISA, upon the Company or any ERISA Affiliate.

          "Event of Default" means any of the events or circumstances
specified in Section 8.01.

          "Excess Cash Flow" means, for any fiscal period, the following,
computed for the four fiscal quarters ending at the end of such period: 
(i) Free Cash Flow less (ii) the sum, without duplication, of the following
computed on an Unconsolidated Basis: (A) interest expense, plus (B)
Scheduled Payments, plus (C) other net reductions in Indebtedness of the
type described in clauses (a) through (f) of the definition thereof, less
(iii) any net increase in working capital, plus (iv) any net decrease in
working capital.  Working capital for this purpose shall mean accounts
receivable, plus inventory, minus accounts payable.

          "Exchange Act" means the Securities Exchange Act of 1934, and
regulations promulgated thereunder.

          "Federal Funds Rate" means, for any day, the rate set forth in
the weekly statistical release designated as H.15(519), or any successor
publication, published by the Federal Reserve Bank of New York (including
any such successor, "H.15(519)") on the preceding Business Day opposite the
caption "Federal Funds (Effective)"; or, if for any relevant day such rate
is not so published on any such preceding Business Day, the rate for such
day will be the arithmetic mean as determined by the Bank of the rates for
the last transaction in overnight Federal funds arranged prior to 9:00 a.m.
(New York City time) on that day by each of three leading brokers of
Federal funds transactions in New York City selected by the Bank.

          "FRB" means the Board of Governors of the Federal Reserve System,
and any Governmental Authority succeeding to any of its principal
functions.

          "Free Cash Flow" means, for any fiscal period, the following,
computed for the four fiscal quarters ending at the end of such period: 
EBITDA, plus SPC's distributions to the Company on account of its
membership interest in SPC, minus capital expenditures computed on an
Unconsolidated Basis (other than capital expenditures constituting the
Acquisition Cost of Timberlands to the extent financed with Term Loans),
plus the Acquisition Cost of standing timber, timber rights, or timberlands
acquired by the Company or any Restricted Subsidiary after the date hereof
and contributed to Salmon Creek Corporation, any of its Subsidiaries, or a
Special Purpose Subsidiary during such fiscal period pursuant to a
Permitted Salmon Creek Transaction; provided, however, that (a) the
foregoing shall be computed without giving effect to the direct or indirect
dividend or distribution to the stockholders of the Company or any of its
Subsidiaries of any Salmon Creek Proceeds and (b) (i) for purposes of
determining Free Cash Flow for the four fiscal quarters ending December 31,
1998, Free Cash Flow shall mean the Free Cash Flow for the fiscal quarter
ending December 31, 1998 multiplied by four; (ii) for purposes of
determining Free Cash Flow for the four fiscal quarters ending March 31,
1999, Free Cash Flow shall mean the Free Cash Flow for the two fiscal
quarters ending March 31, 1999 multiplied by two; and (iii) for purposes of
determining Free Cash Flow for the four fiscal quarters ending June 30,
1999, Free Cash Flow shall mean the Free Cash Flow for the three fiscal
quarters ending June 30, 1999 multiplied by 133%.

          "GAAP" means generally accepted accounting principles set forth
from time to time in the opinions and pronouncements of the Accounting
Principles Board and the American Institute of Certified Public Accountants
and statements and pronouncements of the Financial Accounting Standards
Board (or agencies with similar functions of comparable stature and
authority within the U.S. accounting profession) and which are applicable
to the circumstances.

          "Governmental Authority" means any nation or government, any
state or other political subdivision thereof, any central bank (or similar
monetary or regulatory authority) thereof, any entity exercising executive,
legislative, judicial, regulatory or administrative functions of or
pertaining to government, and any corporation or other entity owned or
controlled, through stock or capital ownership or otherwise, by any of the
foregoing.

          "Guaranty Obligation" means, as applied to any Person, any direct
or indirect liability of that Person with respect to any Indebtedness,
lease, dividend, letter of credit or other obligation (the "primary
obligations") of another Person (the "primary obligor"), including any
obligation of that Person, whether or not contingent, (a) to purchase,
repurchase or otherwise acquire such primary obligations or any property
constituting direct or indirect security therefor, or (b) to advance or
provide funds (i) for the payment or discharge of any such primary
obligation, or (ii) to maintain working capital or equity capital of the
primary obligor or otherwise to maintain the net worth or solvency or any
balance sheet item, level of income or financial condition of the primary
obligor, or (c) to purchase property, securities or services primarily for
the purpose of assuring the owner of any such primary obligation of the
ability of the primary obligor to make payment of such primary obligation,
or (d) otherwise to assure or hold harmless the holder of any such primary
obligation against loss in respect thereof.  The amount of any Guaranty
Obligation shall be deemed equal to the stated or determinable amount of
the primary obligation in respect of which such Guaranty Obligation is made
or, if not stated or if indeterminable, the maximum reasonably anticipated
liability in respect thereof.

          "Hazardous Materials" means all those substances that are
regulated by, or which may form the basis of liability under, any
Environmental Law, including any substance identified under any
Environmental Law as a pollutant, contaminant, hazardous waste, hazardous
constituent, special waste, hazardous substance, hazardous material, or
toxic substance, or petroleum or petroleum derived substance or waste.

          "Honor Date" has the meaning specified in subsection 2.16(b).

          "Incur" means, directly or indirectly, create, incur, issue,
assume, guarantee or become liable with respect to, contingently or
otherwise (and the terms "Incurred" and "Incurrence" have correlative
meanings.

          "Indebtedness" of any Person means, without duplication, (a) all
indebtedness for borrowed money; (b) all obligations issued, undertaken or
assumed as the deferred purchase price of property or services (other than
trade payables entered into in the ordinary course of business on ordinary
terms and other than compensation, pension obligations, and other
obligations arising from employee benefits and employee arrangements); (c)
all non-contingent reimbursement or payment obligations with respect to all
letters of credit (including standby and commercial), banker's acceptances,
bank guaranties, shipside bonds, surety bonds and similar instruments; (d)
all obligations evidenced by notes, bonds, debentures or similar
instruments, including obligations so evidenced incurred in connection with
the acquisition of property, assets or businesses; (e) all indebtedness
created or arising under any conditional sale or other title retention
agreement, or incurred as financing, in either case with respect to
property acquired by the Person (even though the rights and remedies of the
seller or bank under such agreement in the event of default are limited to
repossession or sale of such property); (f) all obligations with respect to
Capital Leases; (g) all indebtedness referred to in clauses (a) through (f)
above secured by (or for which the holder of such Indebtedness has an
existing right, contingent or otherwise, to be secured by) any Lien upon or
in property (including accounts and contracts rights) owned by such Person,
even though such Person has not assumed or become liable for the payment of
such Indebtedness; and (h) all Guaranty Obligations in respect of
indebtedness or obligations of others of the kinds referred to in clauses
(a) through (g) above.

          "Indemnified Liabilities" has the meaning specified in Section
9.05(a).

          "Indemnified Person" has the meaning specified in Section
9.05(a).

          "Insolvency Proceeding" means (a) any case, action or proceeding
before any court or other Governmental Authority relating to bankruptcy,
reorganization, insolvency, liquidation, receivership, dissolution,
winding-up or relief of debtors, or (b) any general assignment for the
benefit of creditors, composition, marshalling of assets for creditors, or
other, similar arrangement in respect of its creditors generally or any
substantial portion of its creditors; undertaken under U.S. Federal, state
or foreign law, including the Bankruptcy Code.

          "Interest Payment Date" means, as to any Offshore Rate Loan, the
last day of each Interest Period applicable to such Loan and, as to any
Base Rate Loan, the last Business Day of each calendar quarter and each
date such Loan is converted into an Offshore Rate Loan, provided, however,
that if any Interest Period an Offshore Rate Loan exceeds three months, the
date that falls three months after the beginning of such Interest Period
and after each Interest Payment Date thereafter is also an Interest Payment
Date.

          "Interest Period" means, as to any Offshore Rate Loan, the period
commencing on the Borrowing Date of such Loan or on the
Conversion/Continuation Date on which the Loan is converted into or
continued as an Offshore Rate Loan, and ending on the date one, two, three
or six months thereafter as selected by the Company in its Notice of
Borrowing or Notice of Conversion/Continuation; provided that:

     (i)  If any Interest Period would otherwise end on a day that is not a
Business Day, that Interest Period shall be extended to the following
Business Day unless, the result of such extension would be to carry such
Interest Period into another calendar month, in which event such Interest
Period shall end on the preceding Business Day;

     (ii) Any Interest Period pertaining to an Offshore Rate Loan that
begins on the last Business Day of a calendar month (or on a day for which
there is no numerically corresponding day in the calendar month at the end
of such Interest Period) shall end on the last Business Day of the calendar
month at the end of such Interest Period; and

     (iii)     No Interest Period for any Term Loan shall extend beyond the
date four years after the Revolving Termination Date and no Interest Period
for any Revolving Loan shall extend beyond the Revolving Termination Date;
and

     (iv) No Interest Period applicable to a Term Loan or portion thereof
shall extend beyond any date upon which is due any scheduled principal
payment in respect of the Term Loans unless the aggregate principal amount
of Term Loans represented by Base Rate Loans or by Offshore Rate Loans
having Interest Periods that will expire on or before such date, equals or
exceeds the amount of such principal payment.

          "Investment" has the meaning specified in Section 7.04.

          "IRS" means the Internal Revenue Service, and any Governmental
Authority succeeding to any of its principal functions under the Code.

          "Issuance Date" means the date of issuance of any Letter of
Credit.

          "Issue" means, with respect to any Letter of Credit to issue or
to extend the expiry of, or to renew or increase the amount of, such Letter
of Credit; and the terms "Issued," "Issuing" and "Issuance" have
corresponding meanings.

          "Joint Venture" means a single-purpose corporation, partnership,
limited liability company, joint venture or other similar legal arrangement
(whether created by contract or conducted through a separate legal entity)
now or hereafter formed by the Company or any of its Subsidiaries with
another Person in order to conduct a common venture or enterprise with such
Person.

          "L/C Amendment Application" means an application form for
amendment of outstanding standby letters of credit as shall at any time be
in use at the Bank, as the Bank shall request.

          "L/C Application" means an application form for issuances of
standby letters of credit as shall at any time be in use at the Bank, as
the Bank shall request.

          "L/C Borrowing" means an extension of credit resulting from a
drawing under any Letter of Credit which shall not have been reimbursed on
the date when made nor converted into a Borrowing of Revolving Loans under
subsection 2.16(b).

          "L/C Obligations" means at any time the sum of (a) the aggregate
undrawn amount of all Letters of Credit then outstanding, plus (b) the
amount of all unreimbursed drawings under all Letters of Credit, including
all outstanding L/C Borrowings.

          "L/C-Related Documents" means the Letters of Credit, the L/C
Applications, the L/C Amendment Applications and any other document
relating to any Letter of Credit, including any of the Bank's standard form
documents for letter of credit Issuances.

          "Lending Office" means, as to the Bank, the office or offices of
the Bank specified as its "Lending Office" or "Domestic Lending Office" or
"Offshore Lending Office", as the case may be, on the signature pages of
this Agreement, or such other office or offices as the Bank may from time
to time notify the Company.

          "Letter of Credit Fee" has the meaning specified in subsection
2.21(a).

          "Letter of Credit Fee Percentage" means with respect to the
Letters of Credit, the per annum rates set forth below opposite the Pricing
Level calculated for periods described below.  The terms "Pricing Level"
and "Pricing Level Change Date" shall have the meanings specified in the
definition of "Applicable Margin."


<TABLE>
<CAPTION>

           Pricing Ratio
 Pricing   at End of           Letter of Credit Fee
 Level     Fiscal Quarter           Percentage
 -----     --------------           ----------
 <S>       <C>                <C>
 I         LESS THAN OR                1.50%
           EQUAL TO 1.00 TO
           1.00
 II        GREATER THAN                1.75%
           1.00 TO 1.00 BUT
           LESS THAN OR
           EQUAL TO 2.00 TO
           1.00
 III       GREATER THAN                2.00%
           2.00 TO 1.00 BUT
           LESS THAN OR
           EQUAL TO 3.00 TO
           1.00
 IV.       GREATER THAN                2.25%
           3.00 TO 1.00 BUT
           LESS THAN OR
           EQUAL TO 4.00 TO
           1.00
 V.        GREATER THAN                2.50%
           4.00 TO 1.00 


</TABLE>
[/CAPTION]

          From the Closing Date until the first Pricing Level Change Date,
the Letter of Credit Fee Percentage shall correspond to the rates per annum
set forth above opposite Pricing Level V.  The Letter of Credit Fee
Percentage shall be adjusted automatically on each Pricing Level Change
Date to correspond with the applicable Pricing Level.  If the Company fails
to deliver such financial reports and certificates to the Agent for any
fiscal quarter by the date required hereunder, then the Letter of Credit
Fee Percentage beginning three Business Days after such date shall, until
three Business Days after delivery of such financial reports and
certificates, be the next higher Letter of Credit Fee Percentage as set
forth in the chart above immediately below the previously effective Letter
of Credit Fee Percentage; thus, if the Letter of Credit Fee Percentage had
previously been 1.50%, a failure to deliver quarterly financials on a
timely basis would cause the Letter of Credit Fee Percentage to be 1.75%
until three Business Days after such delivery.

          "Letters of Credit" means letters of credit Issued under the
Prior Credit Agreement and standby letters of credit Issued pursuant to
this Agreement.

          "Lien" means any security interest, mortgage, deed of trust,
pledge, hypothecation, assignment, charge or deposit arrangement,
encumbrance, lien (statutory or other) or preferential arrangement of any
kind or nature whatsoever in respect of any property (including those
created by, arising under or evidenced by any conditional sale or other
title retention agreement, the interest of a lessor under a Capital Lease,
any financing lease having substantially the same economic effect as any of
the foregoing, or the filing of any financing statement naming the owner of
the asset to which such lien relates as debtor, under the UCC or any
comparable law) and any contingent or other agreement to provide any of the
foregoing, but not including the interest of a lessor under an operating
lease.

          "Loan" means an extension of credit by the Bank to the Company
under Article II, and may be a Base Rate Loan or an Offshore Rate Loan
(each, a "Type" of Loan), and includes any Revolving Loan or Term Loan.

          "Loan Documents" means this Agreement, the Collateral Documents,
the L/C Applications, any documents evidencing or relating to Specified
Swap Contracts with the Bank, and all other documents delivered to the Bank
in connection with the transactions contemplated by this Agreement.

          "Margin Stock" means "margin stock" as such term is defined in
Regulation T, U or X of the FRB. 

          "Material Adverse Effect" means a material adverse change in, or
a material adverse effect upon, any of (a) the operations, business,
properties, condition (financial or otherwise) or financial prospects of
the Company or the Company and its Subsidiaries taken as a whole or as to
SPC; (b) the ability of the Company to perform under any Loan Document and
avoid any Event of Default; (c) the legality, validity, binding effect or
enforceability of any Loan Document; or (d) the perfection or priority of
any Lien granted to the Bank under any of the Collateral Documents.

          "MGHI" means MAXXAM Group Holdings Inc.

          "Mortgaged Property" means all property subject to a Lien
pursuant to a Deed of Trust.

          "Multiemployer Plan" means a "multiemployer plan", within the
meaning of Section 4001(a)(3) of ERISA, to which the Company or any ERISA
Affiliate makes, is making, or is obligated to make contributions or,
during the preceding three calendar years, has made, or been obligated to
make, contributions.

          "Notice of Borrowing" means a notice in substantially the form of
Exhibit A.

          "Notice of Conversion/Continuation" means a notice in
substantially the form of Exhibit B.

          "Notice of Lien" has the meaning specified in Section 7.01(c).

          "Obligations" means all advances, debts, liabilities,
obligations, covenants and duties arising under any Loan Document owing by
the Company to the Bank or any Indemnified Person, whether direct or
indirect (including those acquired by assignment), absolute or contingent,
due or to become due, now existing or hereafter arising.

          "Offshore Rate" means, for any Interest Period, with respect to
any Offshore Rate Loan, the rate of interest per annum at which dollar
deposits in the approximate amount of the Bank's Offshore Rate Loan for
such Interest Period would be offered by the Bank's Grand Cayman Branch,
Grand Cayman, B.W.I. (or such other office as may be designated for such
purpose by the Bank) to major banks in the offshore dollar interbank market
upon request of such banks at approximately 11:00 a.m. (New York City time)
two Business Days prior to the commencement of such Interest Period.

          "Offshore Rate Loan" means a Loan that bears interest based on
the Offshore Rate.

          "Organization Documents" means, for any corporation, the
certificate or articles of incorporation, the bylaws, any certificate of
determination or instrument relating to the rights of preferred
shareholders of such corporation, any shareholder rights agreement, and all
applicable resolutions of the board of directors (or any committee thereof)
of such corporation.

          "Outstanding Letter of Credit" means at any time an Issued and as
yet unexpired Letter of Credit in an amount equal to the undrawn amount of
such Letter of Credit.

          "Participant" has the meaning specified in subsection 9.08(b).

          "PBGC" means the Pension Benefit Guaranty Corporation, or any
Governmental Authority succeeding to any of its principal functions under
ERISA.

          "Pension Plan" means a pension plan (as defined in Section 3(2)
of ERISA) subject to Title IV of ERISA (excluding any Multiemployer Plan)
which the Company sponsors, maintains, or to which it makes, is making, or
is obligated to make contributions, or in the case of a multiple employer
plan (as described in Section 4064(a) of ERISA) has made contributions at
any time during the immediately preceding five (5) plan years.

          "Permitted Liens" has the meaning specified in Section 7.01.

          "Permitted Salmon Creek Transaction" means any or all of the
following: the contribution, transfer, or sale (whether or not for fair
market value) by the Company or any of its Restricted Subsidiaries to
Salmon Creek Corporation, any of its Subsidiaries, or any Special Purpose
Subsidiary of any standing timber, timber rights, or timberlands or of any
equity interest in any Special Purpose Subsidiary, or Investments by the
Company or any of its Restricted Subsidiaries to or in Salmon Creek
Corporation, any of its Subsidiaries, or any Special Purpose Subsidiary of
up to an additional $5,000,000 in cash or other assets in aggregate
cumulative amount after the date hereof.

          "Permitted Swap Obligations" means all obligations (contingent or
otherwise) of the Company existing or arising under Swap Contracts,
provided that each of the following criteria is satisfied:  (a) such
obligations are (or were) entered into by such Person in the ordinary
course of business for the purpose of directly or indirectly mitigating
risks associated with liabilities, commitments or assets held by such
Person, or changes in the value of securities issued by such Person in
conjunction with a securities repurchase program not otherwise prohibited
hereunder, and not for purposes of speculation or taking a "market view;"
(b) such Swap Contracts do not contain (i) any provision ("walk-away"
provision) exonerating the non-defaulting party from its obligation to make
payments on outstanding transactions to the defaulting party, or (ii) with
respect to any Swap Contract that is not a Specified Swap Contract, any
provision creating or permitting the declaration of an event of default,
termination event or similar event upon the occurrence of an Event of
Default hereunder (other than an Event of Default under Section 8.01(a).

          "Person" means an individual, a sole proprietorship, partnership,
corporation, limited liability company, business trust, joint stock
company, trust, unincorporated association, joint venture or Governmental
Authority.

          "Plan" means an employee benefit plan (as defined in Section 3(3)
of ERISA) which the Company sponsors or maintains or to which the Company
makes, is making, or is obligated to make contributions and includes any
Multiemployer Plan or Pension Plan.

          "Preferred Stock" as applied to the Capital Stock or Redeemable
Stock of any corporation, means Capital Stock or Redeemable Stock of any
class or classes (however designated) which is preferred as to the payment
of dividends, or as to the distribution of assets upon any voluntary or
involuntary liquidation or dissolution of such corporation, over shares of
Capital Stock or Redeemable Stock, as the case may be, of any other class
of such corporation. 

          "Pricing Ratio" means, as measured for any fiscal quarter, the
ratio of (a) Debt as of the end of such fiscal quarter to (b) Free Cash
Flow.

          "Prior Credit Agreement" has the meaning specified in the first
"WHEREAS" clause of this Agreement.

          "Receivable Debtor" means the person or entity obligated upon a
Receivable.

          "Receivables" shall have the meaning given in the Company
Security Agreement.

          "Redeemable Stock" of any Person means any equity security of
such Person that by its terms is required to be redeemed prior to the date
four years after the Revolving Termination Date, or is redeemable at the
option of the holder thereof at any time prior to such date.

          "Reportable Event" means, any of the events set forth in Section
4043(b) of ERISA or the regulations thereunder, other than any such event
for which the 30-day notice requirement under ERISA has been waived in
regulations issued by the PBGC.

          "Requirement of Law" means, as to any Person, any law (statutory
or common), treaty, rule or regulation or determination of an arbitrator or
of a Governmental Authority, in each case applicable to or binding upon the
Person or any of its property or to which the Person or any of its property
is subject.

          "Responsible Officer" of a Person means the chief executive
officer or the president, the chief financial officer, the Vice President -
Finance and Administration, the treasurer, assistant treasurer, or any
other officer of such Person having substantially the same authority and
responsibility or designated by the chief executive officer or the chief
financial officer of such Person as having the appropriate authority and
responsibility.

          "Restricted Payment" has the meaning specified in Section 7.12.

          "Restricted Subsidiary" means, as of any determination date, each
of the Subsidiaries of the Company which is not as of such determination
date an Unrestricted Subsidiary of the Company.

          "Revolving Credit" means the credit described in subsection
2.01(b).

          "Revolving Loan" has the meaning specified in subsection 2.01(b).

          "Revolving Termination Date" means the earlier to occur of:

     (a)  October 31, 2001; and

     (b)  the date on which the Bank's commitment to make Loans terminates
in accordance with the provisions of this Agreement.

          "Salmon Creek Corporation" means Salmon Creek Corporation, a
Delaware corporation, or any successor corporation, by way of merger,
consolidation, purchase of all or substantially all of its assets, or
otherwise, but which may not acquire any other assets (other than assets
incidental to the operation, disposition, management and maintenance of
Salmon Creek Property), except in exchange for or out of the proceeds of
the sale or disposition of Salmon Creek Property.

          "Salmon Creek Proceeds" means any consideration received by the
Company or any of its Subsidiaries from any Person (A) in respect of all or
any part of the Capital Stock or Redeemable Stock of Salmon Creek
Corporation, any of its Subsidiaries, or any Special Purpose Subsidiary, or
(B) in respect of all or any part of the real property constituting Salmon
Creek Property, or (C) otherwise in connection with Salmon Creek
Corporation, any of its Subsidiaries, or any Special Purpose Subsidiary, or
Salmon Creek Property, except in each case proceeds of the harvesting of
timber constituting Salmon Creek Property.

          "Salmon Creek Property" means any standing timber, timber rights,
or timberlands (including structures and improvements thereon and related
interests in real property) owned on the date hereof by the Company, SPC,
or Salmon Creek Corporation, any asset held by Salmon Creek Corporation, a
Delaware corporation, on the date hereof, and any other assets obtained in
exchange for or out of the proceeds of the sale or disposition of any of
the foregoing.

          "Scheduled Payments" means the 16 quarterly payments to be made
pursuant to Section 2.08(a).

          "SEC" means the Securities and Exchange Commission, or any
Governmental Authority succeeding to any of its principal functions.

          "Solvent" means, as to any Person at any time, that (a) the fair
value of the property of such Person is greater than the amount of such
Person's liabilities (including disputed, contingent and unliquidated
liabilities) as such value is established and liabilities evaluated for
purposes of Section 101(31) of the Bankruptcy Code and, in the alternative,
for purposes of the California Uniform Fraudulent Transfer Act; (b) the
present fair saleable value of the property of such Person is not less than
the amount that will be required to pay the probable liability of such
Person on its debts as they become absolute and matured; (c) such Person is
able to realize upon its property and pay its debts and other liabilities
(including disputed, contingent and unliquidated liabilities) as they
mature in the normal course of business; (d) such Person does not intend
to, and does not believe that it will, incur debts or liabilities beyond
such Person's ability to pay as such debts and liabilities mature; and (e)
such Person is not engaged in business or a transaction, and is not about
to engage in business or a transaction, for which such Person's property
would constitute unreasonably small capital.

          "Specified Swap Contract" means any Swap Contract made or entered
into at any time, or in effect at any time (whether heretofore or
hereafter), whether directly or indirectly, and whether as a result of
assignment or transfer or otherwise, between the Company and any Swap
Provider which Swap Contract is or was intended by the Company to have been
entered into, in part or entirely, for purposes of mitigating interest rate
risk relating to any Loan (which intent shall conclusively be deemed to
exist if the Company so represents to the Swap Provider in writing), and as
to which the final scheduled payment by the Company is not later than the
sixth anniversary of this Agreement.

          "SPC" means Scotia Pacific Company LLC, a Wholly-Owned Subsidiary
of the Company.

          "Special Purpose Subsidiary" means a Subsidiary of the Company
created after the Closing Date, capitalized with no material assets other
than standing timber, timber rights, or timberlands owned by the Company or
any of its Subsidiaries on the Closing Date, and designated by the Company
as an Unrestricted Subsidiary in connection with such capitalization.

          "Subsidiary" means, with respect to any Person, (i) any
corporation of which more than 50% of the outstanding Capital Stock and
Redeemable Stock having ordinary voting power to elect a majority of the
board of directors of the corporation (irrespective of whether at the time
Capital Stock or Redeemable Stock of any other class or classes of such
corporation shall or might have voting power upon the occurrence of any
contingency) is at the time owned, directly or indirectly, by such Person,
or by one or more other Subsidiaries of such Person, or by such Person and
one or more other Subsidiaries of such Person, or (ii) any other entity of
which more than 50% of the outstanding equity ownership interests are at
the time owned, directly or indirectly, by such Person, or by one or more
other Subsidiaries of such Person, or by such Person and one or more other
Subsidiaries of such Person.

          "Swap Contract" means any agreement, whether or not in writing,
relating to any transaction that is a rate swap, basis swap, forward rate
transaction, commodity swap, commodity option, equity or equity index swap
or option, bond, note or bill option, interest rate option, forward foreign
exchange transaction, cap, collar or floor transaction, currency swap,
cross-currency rate swap, swaption, currency option or any other, similar
transaction (including any option to enter into any of the foregoing) or
any combination of the foregoing, and, unless the context otherwise clearly
requires, any master agreement relating to or governing any or all of the
foregoing.  Investments made pursuant to the Bear Stearns Investment
Advisory Contract are not Swap Contracts for purposes of this Agreement and
any other Loan Document.

          "Swap Provider" means the Bank, or any Affiliate of the Bank,
that is at the time of determination party to a Swap Contract with the
Company.

          "Swap Termination Value" means, in respect of any one or more
Swap Contracts, after taking into account the effect of any legally
enforceable netting agreement relating to such Swap Contracts, (a) for any
date on or after the date such Swap Contracts have been closed out and
termination value(s) determined in accordance therewith, such termination
value(s), and (b) for any date prior to the date referenced in clause (a)
the amount(s) determined as the mark-to-market value(s) for such Swap
Contracts, as determined by the Company based upon one or more mid-market
or other readily available quotations provided by any recognized dealer in
such Swap Contracts (which may include the Bank.)

          "Tax Sharing Agreement" means the Tax Allocation Agreement, dated
May 21, 1988, by and among MAXXAM Inc., the Company, and certain other
subsidiaries of MAXXAM Inc., as amended by the Tax Allocation Agreement,
dated as of March 23, 1993, by and among MAXXAM Inc., the Company, Scotia
Pacific Holding Company, and Salmon Creek Corporation.

          "Term Sublimit" means the lesser of (a) $30,000,000, and (b) (i)
the lesser of the Commitment and the Borrowing Base minus (ii) the
Effective Amount of Revolving Loans and L/C Obligations.

          "Term Credit" means the credit described in subsection 2.01(a).

          "Term Loan" has the meaning specified in subsection 2.01(a).

          "Timber Notes" means the 6.55% Class A-1, 7.11% Class A-2 and
7.71% Class A-3 Timber Collateralized Notes due 2028, issued by SPC
pursuant to the Indenture dated as of July 20, 1998, between SPC and State
Street Bank and Trust Company, as trustee, including any notes issues by
SPC pursuant to such Indenture pursuant to one or more exchange offers
registered under the Securities Act of 1933, as amended.

          "Timberlands" means standing timber, timber rights, or
timberlands of the Company located in California, the purchase price of
which is, in whole or in part, paid from or refinanced by the Term Loans,
which timberlands are encumbered by first priority Deeds of Trust securing
the Obligations of the Company to the Bank under this Agreement and the
other Loan Documents.

          "Type" has the meaning specified in the definition of "Loan."

          "UCC" means the Uniform Commercial Code as in effect in the State
of California.

          "Unconsolidated Basis" means the Company and its Restricted
Subsidiaries other than SPC on a consolidated basis.

          "Unfunded Pension Liability" means the excess of a Pension Plan's
benefit liabilities under Section 4001(a)(16) of ERISA, over the current
value of that Pension Plan's assets, determined in accordance with the
assumptions used for funding the Pension Plan pursuant to Section 412 of
the Code for the applicable plan year.

          "Unrestricted Subsidiary" means (a) each of the Subsidiaries of
the Company so designated after the date hereof by a resolution adopted by
the Company's Board of Directors and as to which designation the Bank has
given its prior written approval, (b) any Subsidiary of an Unrestricted
Subsidiary, (c) Salmon Creek Corporation, and (d) any Special Purpose
Subsidiary.  The Board of Directors may designate an Unrestricted
Subsidiary to be a Restricted Subsidiary if no Default or Event of Default
would arise by virtue of such designation. 

          "Wholly-Owned Restricted Subsidiary" means any Restricted
Subsidiary that is a Wholly-Owned Subsidiary. 

          "Wholly-Owned Subsidiary" means (i) a corporation of which all of
the outstanding shares of Capital Stock and Redeemable Stock having
ordinary voting power to elect a majority of the board of directors of such
corporation (irrespective of whether at the time Capital Stock or
Redeemable Stock of any other class or classes of such corporation shall or
might have voting power upon the occurrence of any contingency) are owned
at the time, directly or indirectly (through one or more Wholly-Owned
Restricted Subsidiaries), by the Company (except for director's qualifying
shares), or (ii) any other entity of which all of the outstanding equity
ownership interests are owned at the time, directly or indirectly (through
one or more Wholly-Owned Restricted Subsidiaries), by the Company.

          1.02 Other Interpretive Provisions.

     (a)  The meanings of defined terms are equally applicable to the
singular and plural forms of the defined terms.

     (b)  The words "hereof", "herein", "hereunder" and similar words refer
to this Agreement as a whole and not to any particular provision of this
Agreement; and subsection, Section, Schedule and Exhibit references are to
this Agreement unless otherwise specified.

     (c)  Terms:

          (1)  The term "documents" includes any and all instruments,
documents, agreements, certificates, indentures, notices and other
writings, however evidenced.

          (2)  The term "including" is not limiting and means "including
without limitation."

          (3)  In the computation of periods of time from a specified date
to a later specified date, the word "from" means "from and including"; the
words "to" and "until" each mean "to but excluding", and the word "through"
means "to and including."

          (4)  The term "property" includes any kind of property or asset,
real, personal or mixed, tangible or intangible.

     (d)  Unless otherwise expressly provided herein, (i) references to
agreements (including this Agreement) and other contractual instruments
shall be deemed to include all subsequent amendments and other
modifications thereto, but only to the extent such amendments and other
modifications are not prohibited by the terms of any Loan Document, and
(ii) references to any statute or regulation are to be construed as
including all statutory and regulatory provisions consolidating, amending,
replacing, supplementing or interpreting the statute or regulation.

     (e)  The captions and headings of this Agreement are for convenience
of reference only and shall not affect the interpretation of this
Agreement.

     (f)  This Agreement and other Loan Documents may use several different
limitations, tests or measurements to regulate the same or similar matters. 
All such limitations, tests and measurements are cumulative and shall each
be performed in accordance with their terms.

     (g)  This Agreement and the other Loan Documents are the result of
negotiations among and have been reviewed by counsel to the Bank, the
Company and the other parties, and are the products of all parties. 
Accordingly, they shall not be construed against the Bank merely because of
the Bank's involvement in their preparation.

          1.03 Accounting Principles.

     (a)  Unless the context otherwise clearly requires, all accounting
terms not expressly defined herein shall be construed, and all financial
computations required under this Agreement shall be made, in accordance
with GAAP, consistently applied.

     (b)  References herein to "fiscal year" and "fiscal quarter" refer to
such fiscal periods of the Company.

                                 ARTICLE II

                                THE CREDITS

          2.01 The Term Credit and the Revolving Credit.

     (a)  The Term Credit.  The Bank agrees, on the terms and conditions
set forth herein, to make loans to the Company (each such Loan, a "Term
Loan") from time to time on any Business Day during the period from the
Closing Date to the Revolving Termination Date in an aggregate amount not
to exceed the Term Sublimit.

     (b)  The Revolving Credit.  The Bank agrees, on the terms and
conditions hereinafter set forth, to make loans to the Company (each such
loan a "Revolving Loan") and to Issue Letters of Credit for the account of
the Company from time to time on any Business Day during the period from
the Closing Date to the Revolving Termination Date, in an aggregate amount
not to exceed at any time outstanding the lesser of the Commitment or the
Borrowing Base;  provided, however, that:

          (1)  After giving effect to any Loan and/or the Issuance of a
Letter of Credit, the Effective Amount of all Loans and L/C Obligations
shall not exceed the lesser of the Commitment or the Borrowing Base; and

          (2)  After the Issuance of a Letter of Credit, the Effective
Amount of all L/C Obligations shall not exceed $20,000,000.

     (c)  Reborrowing.  Within the limits of the Term Sublimit, the
Commitment and the Borrowing Base and subject to the other terms and
conditions hereof, the Company may, pursuant to the terms of this Agreement
(x) borrow, prepay, and reborrow under this Section 2.01; and (y) obtain
Letters of Credit and obtain new Letters of Credit in place of Letters of
Credit that have been discharged by performance and reimbursement to the
Bank or which have expired.

     (d)  Obligations under the Prior Credit Agreement.  From and after the
Closing Date, all "Standby Letters of Credit", "Loans", and "Letter of
Credit Obligations" of the Company to the Bank under the Prior Credit
Agreement shall be deemed to be Letters of Credit, Revolving Credit Loans,
and L/C Obligations, respectively, under this Agreement, included in the
computations required hereunder and subject to the provisions hereof.

          2.02 Loan Accounts.

          The Loans made by the Bank shall be evidenced by one or more loan
accounts or records maintained by the Bank in the ordinary course of
business.  The loan accounts or records maintained by the Bank shall be
evidence of the amount of the Loans made by the Bank to the Company and the
interest and payments thereon.  Any failure so to record or any error in
doing so shall not, however, limit or otherwise affect the obligation of
the Company hereunder to pay any amount owing with respect to the Loans.

          2.03 Procedure for Borrowing.

     (a)  Each Loan shall be made upon the Company's irrevocable written
notice (including notice via facsimile transmission confirmed immediately
by a telephone call) delivered to the Bank in the form of a Notice of
Borrowing (which notice must be received by the Bank prior to (i) 9:00 a.m.
(San Francisco, California time) three Business Days prior to the requested
Borrowing Date, in the case of Offshore Rate Loans; and (ii) 11:00 a.m. San
Francisco, California time on the requested Borrowing Date, in the case of
Base Rate Loans, specifying:

          (1)  The amount of the Loan, which shall be in minimum amounts of
$500,000 for Offshore Rate Loans and $100,000 for Base Rate Loans;

          (2)  The requested Borrowing Date, which shall be a Business Day;

          (3)  Whether each Loan is to be a Term Loan or Revolving Loan and
whether each Loan is to be an Offshore Rate Loan or a Base Rate Loan; and

          (4)  The duration of the Interest Period applicable to the
Offshore Rate Loans included in such notice.  If the Notice of Borrowing
fails to specify the duration of the Interest Period for any Offshore Rate
Loans, such Interest Period shall be three months.

     (b)  The proceeds of the Loans will be made available to the Company
by the Bank by crediting the account of the Company on the books of the
Bank with such proceeds or by wire transfer in accordance with written
instructions provided to the Bank by the Company.

     (c)  After disbursement of any Loan, unless the Bank shall otherwise
consent, there may not be more than ten different Interest Periods in
effect.

          2.04 Conversion and Continuation Elections.

     (a)  The Company may, upon irrevocable written notice to the Bank in
accordance with subsection 2.04(b):

          (1)  Elect to convert on any Business Day, any Base Rate Loans
(or any part thereof in a minimum amount of $500,000) into Offshore Rate
Loans or;

          (2)  Elect to convert on any Interest Payment Date any Offshore
Rate Loans maturing on such Interest Payment Date (or any part thereof in a
minimum amount of $100,000) into Base Rate Loans; or

          (3)  Elect to renew on any Interest Payment Date any Offshore
Rate Loans maturing on such Interest Payment Date (or any part thereof in a
minimum amount of $500,000);

provided, that if at any time an Offshore Rate Loan is reduced, by payment,
prepayment, or conversion of part thereof to be less than $500,000, such
Offshore Rate Loan shall automatically convert into a Base Rate Loan, and
on and after such date the right of the Company to continue such Loan as,
and convert such Loan into, an Offshore Rate Loan shall terminate.

     (b)  The Company shall deliver by telex, cable or facsimile, confirmed
immediately in writing, a Notice of Conversion/Continuation to be received
by the Bank not later than (i) 9:00 a.m. San Francisco, California time at
least three Business Days in advance of the Conversion/Continuation Date,
if the Loans are to be converted into or continued as Offshore Rate Loans;
and (ii) noon San Francisco, California time one Business Day in advance of
the Conversion Date or continuation date, if the Loans are to be converted
into or renewed as Base Rate Loans, specifying:

          (1)  The proposed Conversion/Continuation Date;

          (2)  The aggregate amount of Loans to be converted or renewed;

          (3)  The nature of the proposed conversion or continuation; and

          (4)  The duration of the requested Interest Period.

     (c)  If upon the expiration of any Interest Period applicable to
Offshore Rate Loans, the Company has failed to select a new Interest Period
to be applicable to such Offshore Rate Loans, or if any Default or Event of
Default shall then exist, the Company shall be deemed to have elected to
convert such Offshore Rate Loans into Base Rate Loans effective as of the
expiration date of such current Interest Period.

     (d)  Unless the Bank otherwise consents, during the existence of a
Default or Event of Default, the Company may not elect to have a Loan
converted into or continued as an Offshore Rate Loan.

     (e)  After giving effect to any conversion or continuation of Loans,
unless the Bank shall otherwise consent, there may not be more than ten
different Interest Periods in effect.

          2.05 Voluntary Termination or Reduction of Commitment.

          The Company may, upon not less than five Business Days' prior
notice to the Bank, at any time before the Revolving Termination Date,
terminate the Bank's commitment to make Loans or permanently reduce the
amount of the Commitment by a minimum amount of $1,000,000 or any whole
multiple of $1,000,000 in excess thereof; unless, after giving effect
thereto and to any prepayments of Loans made on the effective date thereof,
the Effective Amount of all Loans and L/C Obligations would exceed the
amount of the Commitment then in effect and, provided, further, that once
reduced in accordance with this Section, the Commitment may not be
increased.  If the Commitment is terminated in its entirety, all accrued
Commitment Fees to the effective date of such termination shall be payable
on the effective date of such termination without any premium or penalty.

          2.06 Optional Prepayments.

          Subject to Section 3.04, the Company may, at any time or from
time to time, upon not less than three Business Days' (with respect to
Offshore Rate Loans) and same Business Day (with respect to Base Rate
Loans) irrevocable notice to the Bank, prepay Loans in whole or in part, in
minimum prepayments of $500,000 for Offshore Rate Loans and $100,000 for
Base Rate Loans (or, in each case, such lesser amount as represents the
entire outstanding amount of such Offshore Rate Loan or Base Rate Loan).  
Such notice of prepayment shall specify the date and amount of such
prepayment and the Type(s) of Loans to be prepaid, whether such Loans are
Term Loans or Revolving Loans, and in the case of Offshore Rate Loans,
which Offshore Rate Loans are to be prepaid.  If such notice is given by
the Company, the Company shall make such prepayment and the payment amount
specified in such notice shall be due and payable on the date specified
therein, together with accrued interest to each such date on the amount
prepaid and any amounts required pursuant to Section 3.04.  Optional
prepayments of Term Loans made after the Revolving Termination Date shall
be applied to the most remote principal installments of the Term Loans.

          2.07 Mandatory Prepayments of Loans.

     (a)  Mandatory Prepayments, Cash Collateral.  If at any time and for
any reason the Effective Amount of the Loans and the L/C Obligations
exceeds the lesser of the Commitment or the Borrowing Base, the Company
shall pay to Bank, upon Bank's election and demand, the amount of the
excess.  Payments under this Section may be applied to the obligations of
the Company relating to the Loans and L/C Obligations in the order and
manner as the Company in its discretion may determine.  Payments to be
applied to Outstanding Letters of Credit may, at Bank's option, be used to
prepay, or held as cash collateral to secure, the Company's obligations to
Bank with respect thereto and L/C Obligations.

     (b)  Annual Excess Cash Flow Recapture.  On or before the date 105
days after the end of each fiscal year commencing with the fiscal year of
the Company ending December 31, 2000, the Company shall prepay the Term
Loans in an amount equal to the lesser of (1) the Effective Amount of all
Term Loans that have been, as of the end of such prior fiscal year,
outstanding for one year or more, and (2) 50% of Excess Cash Flow for such
fiscal year, as calculated based upon the financial data contained in the
Company's financial statements for the fourth fiscal quarter of each fiscal
year delivered pursuant to subsection 6.01(c)(ii) and the Compliance
Certificate delivered with respect to that fiscal quarter pursuant to
subsection 6.02(a).  Mandatory prepayments of the Term Loans pursuant to
this subsection  made after the Revolving Termination Date shall be applied
to the Scheduled Payments in the inverse order of their maturity.

     (c)  Clean-up Period.  The Company agrees to borrow, repay, and
reborrow under the Revolving Credit such that in each calendar year there
shall be at least one period of 30 consecutive days in which there are no
outstanding Revolving Loans under this Agreement.

     (d)  General.  Except as provided in subsection 2.07(b), any
prepayments relating to the Loans made pursuant to this Section shall be
applied as instructed by the Company; provided, however, that the Company
may, at its option, place any amounts which it would otherwise be required
to use to prepay Offshore Rate Loans on a day other than the last day of
the Interest Period therefor in an interest-bearing account pledged to the
Bank until the end of such Interest Period at which time such pledged
amounts will be credited to the prepayment of such Offshore Rate Loans. 
The Company shall pay, together with each prepayment under this Section,
accrued interest on the amount prepaid and any amounts required under
Section 3.04.

          2.08 Scheduled Repayment.

     (a)  The Term Credit.  The Company shall repay the aggregate amount of
the Term Loans outstanding as of the close of business on the Revolving
Termination Date in 16 equal principal installments on each January 31, May
31, August 31, and October 31 occurring after the Revolving Termination
Date until repayment in full.  All remaining unpaid principal of the Term
Loans and interest thereon shall be due and payable on the date four years
after the Revolving Termination Date.

     (b)  The Revolving Credit.  The Company shall repay to the Bank in
full on the Revolving Termination Date the aggregate principal amount of
Revolving Loans outstanding on such date.

          2.09 Interest.

     (a)  Each Loan shall bear interest on the outstanding principal amount
thereof from its Borrowing Date at a rate per annum equal to the Offshore
Rate or the Base Rate, as the case may be (and subject to the Company's
right to convert to other Types of Loans under Section 2.04), plus the
Applicable Margin.

     (b)  Interest on each Loan shall be paid in arrears on each Interest
Payment Date.  Interest shall also be paid on the date of any prepayment of
Offshore Rate Loans under Sections 2.06 or 2.07 for the portion of the
Offshore Rate Loans so prepaid and upon payment (including prepayment) in
full thereof and, during the existence of any Event of Default, interest
shall be paid on demand of the Bank.

     (c)  Notwithstanding subsection (a) of this Section, while any Event
of Default exists or after acceleration, the Company shall pay interest
(after as well as before entry of judgment thereon to the extent permitted
by law) on the principal amount of all Obligations due and unpaid, at a
rate per annum which is determined by adding 2% per annum to the Applicable
Margin then in effect for such Loans and, in the case of Obligations not
subject to an Applicable Margin, at a rate per annum equal to the Base Rate
plus the Applicable Margin then in effect for Base Rate Loans plus 2%;
provided, however, that, on and after the expiration of any Interest Period
applicable to any Offshore Rate Loan outstanding on the date of occurrence
of such Event of Default or acceleration, the principal amount of such Loan
shall, during the continuation of such Event of Default or after
acceleration, bear interest at a rate per annum equal to the Base Rate plus
the Applicable Margin then in effect for Base Rate Loans plus 2%.

     (d)  Anything herein to the contrary notwithstanding, the obligations
of the Company to the Bank hereunder shall be subject to the limitation
that payments of interest shall not be required, for any period for which
interest is computed hereunder, to the extent (but only to the extent) that
contracting for or receiving such payment by the Bank would be contrary to
the provisions of any law applicable to the Bank limiting the highest rate
of interest that may be lawfully contracted for, charged or received by the
Bank, and in such event the Company shall pay the Bank interest at the
highest rate permitted by applicable law.

          2.10 Fees.

     (a)  Commitment Fee.

          (1)  The Company shall pay to the Bank a commitment fee
("Commitment Fee") for each day from the Closing Date through the Revolving
Termination Date in an amount equal to the product of (i) the unused
portion (which excludes the Effective Amount of L/C Obligations) of the
Commitment  in effect on such date multiplied by (ii) 1/360th of the
Commitment Fee Percentage in effect on such day.  Such Commitment Fee shall
be due and payable quarterly in arrears on December 31, 1998 and thereafter
on the last Business Day of each calendar quarter commencing on the first
such date occurring after the date of this Agreement through the Revolving
Termination Date, with the final payment to be made on the Revolving
Termination Date.

          (2)  The Commitment Fee provided in this subsection shall accrue
at all times after the above-mentioned commencement date, including at any
time during which one or more conditions in Article IV are not met.

     (b)  Arrangement Fee.  The Company shall pay $250,000 to the Bank on
the Closing Date as an arrangement fee.

     (c)  Utilization Fees.  The Company shall pay a utilization fee on the
Term Credit upon each borrowing of Term Loans if and to the extent such
borrowing would cause the Effective Amount of Term Loans to equal or
exceed, for the first time after the Closing Date, the threshold amounts
set forth under "Term Loans Outstanding" below.  The Utilization Fee
payable upon each such threshold being met is set forth opposite such
threshold below.


<TABLE>
<CAPTION>


 <S>                              <C>
 Term Loans Outstanding           Utilization Fee
 ----------------------           ---------------
 $2,500,000                       $50,000
 $7,500,000                       another $50,000
 $12,500,000                      another $50,000
 $17,500,000                      another $50,000


</TABLE>
[/CAPTION]

For example:  Assume this Agreement is executed on November 16, 1998.  On
November 20, 1998 the Company borrows $6,000,000 in Term Loans.  The
Company shall pay the Bank on such date a utilization fee of $50,000.  On
January 12, 1999, the Company borrows an additional $1,000,000 in Term
Loans.  No utilization fee is due from the Company on that date.  On
January 29, 1999, the Company borrows an additional $5,500,000 in Term
Loans so that the Effective Amount of Terms Loans is $12,500,000.  A
utilization fee of $100,000 is due the Bank on such date.

          2.11 Computation of Fees and Interest.

     (a)  All computations of interest for Base Rate Loans when the Base
Rate is determined by the Bank's "reference rate" shall be made on the
basis of a year of 365 or 366 days, as the case may be, and actual days
elapsed.  All other computations of fees and interest shall be made on the
basis of a 360-day year and actual days elapsed (which results in more
interest and fees being paid than if computed on the basis of a 365-day
year).  Interest and fees shall accrue during each period during which
interest or such fees are computed from the first day thereof to the last
day thereof.

     (b)  Any change in the interest rate on a Loan resulting from a change
in the Applicable Margin shall become effective as of the opening of
business on the day on which such change in the Applicable Margin becomes
effective.

     (c)  Each determination of an interest rate by the Bank shall be
conclusive and binding on the Company in the absence of manifest error.

          2.12 Payments by the Company.

     (a)  All payments to be made by the Company shall be made without
set-off, recoupment or counterclaim.  Except as otherwise expressly
provided herein, all payments by the Company shall be made to the Bank at
the place indicated as the place of payment in the signature pages to this
Agreement or such other place of payment as the Bank may specify to the
Company in writing from time to time, and shall be made in dollars and in
immediately available funds, no later than 10:00 a.m. (San Francisco,
California time) for Offshore Rate Loans and no later than 1:00 p.m. (San
Francisco, California time) for Base Rate Loans, in each case on the date
specified herein.  Any payment received by the Bank later than such
specified times shall be deemed to have been received on the following
Business Day and any applicable interest or fee shall continue to accrue.

     (b)  Subject to the provisions set forth in the definition of
"Interest Period" herein, whenever any payment is due on a day other than a
Business Day, such payment shall be made on the following Business Day, and
such extension of time shall in such case be included in the computation of
interest or fees, as the case may be.

          2.13 Security.

     (a)  All obligations of the Company under this Agreement, and all
other Loan Documents shall be secured in accordance with the Collateral
Documents; except that the obligations of the Company to the Bank under
Specified Swap Contracts shall be secured by the Deeds of Trust only if a
written agreement(s) between the Company and the Bank specifically states
that the Specified Swap Contract(s) described in such agreement(s) is or
are secured by the Deeds of Trust.  The Company hereby ratifies and
reaffirms all of the Liens previously granted in favor of the Bank pursuant
to the Company Security Agreement, which Liens are and continue to be
perfected and of first priority.

     (b)  The Bank agrees to release its security interest in the inventory
and Receivables upon (i) the termination of the Bank's commitment to make
Loans and (ii) the Effective Amount of L/C Obligations and Revolving Loans
being reduced to $0, if at the time such release is to occur, (x) the
Acquisition Cost of the Timberlands subject to the Deeds of Trust is equal
to or greater than 200% of the aggregate principal amount of the then
outstanding Term Loans, and (y) no Default or Event of Default exists.

     (c)  From time to time upon the request of the Company, the Bank
agrees to release its Lien upon Timberlands that have remained subject to a
Deed of Trust hereunder after the Effective Amount of Term Loans has been
reduced to $0 (regardless of whether additional Term Loans were made
thereafter to finance the Acquisition Cost of other Timberlands), if at the
time such release is to occur and after giving effect to the corresponding
diminution of the Borrowing Base, (x) the Effective Amount of all Loans and
L/C Obligations does not exceed the Borrowing Base, and (y) no Default or
Event of Default exists.

          2.14 The Letter of Credit Subfacility.

          The Bank is under no obligation to Issue any Letter of Credit if:

     (a)  any order, judgment or decree of any Governmental Authority or
arbitrator shall by its terms purport to enjoin or restrain the Bank from
Issuing such Letter of Credit, or any Requirement of Law applicable to the
Bank or any request or directive (whether or not having the force of law)
from any Governmental Authority with jurisdiction over the Bank shall
prohibit, or request that the Bank refrain from, the Issuance of letters of
credit generally or such Letter of Credit in particular or shall impose
upon the Bank with respect to such Letter of Credit any restriction,
reserve or capital requirement (for which the Bank is not otherwise
compensated hereunder) not in effect on the Closing Date, or shall impose
upon the Bank any unreimbursed loss, cost or expense which was not
applicable on the Closing Date and which the Bank in good faith deems
material to it;

     (b)  the expiry date of any requested Letter of Credit is (A) more
than 365 days after the date of Issuance, unless the Bank has approved such
expiry date in writing, or (B) after the Revolving Termination Date, unless
the Bank has approved such expiry date in writing;

     (c)  the expiry date of any requested Letter of Credit is prior to the
maturity date of any financial obligation to be supported by the requested
Letter of Credit;

     (d)  any requested Letter of Credit does not provide for drafts, or is
not otherwise in form and substance acceptable to the Bank, or the Issuance
of a Letter of Credit shall violate any applicable policies of the Bank;

     (e)  any standby Letter of Credit is for the purpose of supporting the
issuance of any letter of credit by any other Person; or

     (f)  such Letter of Credit is to be denominated in a currency other
than Dollars.

          2.15 Issuance, Amendment and Renewal of Letters of Credit.

     (a)  Each Letter of Credit shall be issued upon the written request of
the Company received by the Bank at least three Business Days (or such
shorter time as the Bank may agree in a particular instance in its sole
discretion) prior to the proposed date of issuance.  Each such request for
issuance of a Letter of Credit shall be by facsimile, confirmed immediately
in an original writing, in the form of an L/C Application, and shall
specify in form and detail satisfactory to the Bank: (i) the proposed date
of issuance of the Letter of Credit (which shall be a Business Day); (ii)
the face amount of the Letter of Credit; (iii) the expiry date of the
Letter of Credit; (iv) the name and address of the beneficiary thereof; (v)
the documents to be presented by the beneficiary of the Letter of Credit in
case of any drawing thereunder; (vi) the full text of any certificate to be
presented by the beneficiary in case of any drawing thereunder; and (vii)
such other matters as the Bank may require.  Such request may be withdrawn
by the Company, but the fees owing on account of any requested Letter of
Credit pursuant to Section 2.20(b) shall be fully earned upon the
submission of such request notwithstanding its later withdrawal.

     (b)  From time to time while a Letter of Credit is outstanding and
prior to the Revolving Termination Date, the Bank will, upon the written
request of the Company received by the Bank at least three Business Days
(or such shorter time as the Bank may agree in a particular instance in its
sole discretion) prior to the proposed date of amendment, amend any Letter
of Credit issued by it.  Each such request for amendment of a Letter of
Credit shall be made by facsimile, confirmed immediately in an original
writing, made in the form of an L/C Amendment Application and shall specify
in form and detail satisfactory to the Bank:  (i) the Letter of Credit to
be amended; (ii) the proposed date of amendment of the Letter of Credit
(which shall be a Business Day); (iii) the nature of the proposed
amendment; and (iv) such other matters as the Bank may require.  The Bank
shall be under no obligation to amend any Letter of Credit if:  (A) the
Bank would have no obligation at such time to issue such Letter of Credit
in its amended form under the terms of this Agreement; or (B) the
beneficiary of any such Letter of Credit does not accept the proposed
amendment to the Letter of Credit.

     (c)  The Bank agrees that, while a Letter of Credit is outstanding and
prior to the Revolving Termination Date, at the option of the Company and
upon the written request of the Company received by the Bank at least three
Business Days (or such shorter time as the Bank may agree in a particular
instance in its sole discretion) prior to the proposed date of notification
of renewal, the Bank shall renew any Letter of Credit issued by it.  Each
such request for renewal of a Letter of Credit shall be made by facsimile,
confirmed immediately in an original writing, in the form of an L/C
Amendment Application, and shall specify in form and detail satisfactory to
the Bank: (i) the Letter of Credit to be renewed; (ii) the proposed date of
notification of renewal of the Letter of Credit (which shall be a Business
Day); (iii) the revised expiry date of the Letter of Credit; and (iv) such
other matters as the Bank may require.  The Bank shall be under no
obligation so to renew any Letter of Credit if: (A) the Bank would have no
obligation at such time to issue or amend such Letter of Credit in its
renewed form under the terms of this Agreement; or (B) the beneficiary of
any such Letter of Credit does not accept the proposed renewal of the
Letter of Credit.  If any outstanding Letter of Credit shall provide that
it shall be automatically renewed unless the beneficiary thereof receives
notice from the Bank that such Letter of Credit shall not be renewed, and
if at the time of renewal the Bank would be obligated to authorize the
automatic renewal of such Letter of Credit in accordance with this
subsection 2.15(c) upon the request of the Company but the Bank shall not
have received any L/C Amendment Application from the Company with respect
to such renewal or other written direction by the Company with respect
thereto, the Bank shall nonetheless be permitted to allow such Letter of
Credit to renew, and the Company hereby authorizes such renewal, and,
accordingly, the Bank shall be deemed to have received an L/C Amendment
Application rom the Company requesting such renewal.

     (d)  The Bank may, at its election, deliver any notices of termination
or other communications to any Letter of Credit beneficiary or transferee,
and take any other action as necessary or appropriate, at any time and from
time to time, in order to cause the expiry date of such Letter of Credit to
be a date not later than the Revolving Termination Date.

     (e)  This Agreement shall control in the event of any conflict with
any L/C-Related Document (other than any Letter of Credit).

          2.16 Existing Letters of Credit; Drawings and Reimbursements.

     (a)  On and after the Closing Date, the Standby Letters of Credit as
defined in the Prior Credit Agreement shall be deemed for all purposes,
including for purposes of the fees to be collected pursuant to subsections
2.20(a) and 2.20(b), and reimbursement of costs and expenses to the extent
provided herein, Letters of Credit outstanding under this Agreement and
entitled to the benefits of this Agreement and the other Loan Documents,
and shall be governed by the applications and agreements pertaining thereto
and by this Agreement.

     (b)  In the event of any request for a drawing under a Letter of
Credit by the beneficiary or transferee thereof, the Bank will promptly
notify the Company.  The Company shall reimburse the Bank prior to 10:00
a.m. San Francisco time, on each date that any amount is paid by the Bank
under any Letter of Credit (each such date, an "Honor Date"), in an amount
equal to the amount so paid by the Bank.  In the event the Company fails to
reimburse the Bank for the full amount of any drawing under any Letter of
Credit by 10:00 a.m. San Francisco time on the Honor Date, the Company
shall be deemed to have requested that a Revolving Loan constituting a Base
Rate Loan be made by the Bank to be disbursed on the Honor Date under such
Letter of Credit, subject to the amount of the unutilized portion of the
Commitment and subject to the conditions set forth in Section 4.02.  Any
notice given by the Bank pursuant to this subsection 2.16(b) may be oral if
immediately confirmed in writing (including by facsimile); provided that
the lack of such an immediate confirmation shall not affect the
conclusiveness or binding effect of such notice.

     (c)  With respect to any unreimbursed drawing that is not converted
into Revolving Loans consisting of Base Rate Loans to the Company in whole
or in part, because of the Company's failure to satisfy the conditions set
forth in Section 4.02 or for any other reason, the Company shall be deemed
to have incurred from the Bank an L/C Borrowing in the amount of such
drawing, which L/C Borrowing shall be due and payable on demand (together
with interest) and shall bear interest at a rate per annum equal to the
Base Rate plus the Applicable Margin then applicable to the Base Rate Loans
plus 2% per annum.

          2.17 Role of the Bank.

     (a)  The Company agrees that, in paying any drawing under a Letter of
Credit, the Bank shall not have any responsibility to obtain any document
(other than any sight draft and certificates expressly required by the
Letter of Credit) or to ascertain or inquire as to the validity or accuracy
of any such document or the authority of the Person executing or delivering
any such document.

     (b)  The Company hereby assumes all risks of the acts or omissions of
any beneficiary or transferee with respect to its use of any Letter of
Credit; provided, however, that this assumption is not intended to, and
shall not, preclude the Company's pursuing such rights and remedies as it
may have against the beneficiary or transferee at law or under any other
agreement.  The Bank shall not be liable or responsible for any of the
matters described in clauses (a) through (g) of Section 2.18; provided,
however, nothing in such clauses or this Section shall limit any claim the
Company may have against the Bank, or the Bank's liability to the Company,
for any direct, as opposed to consequential or exemplary, damages suffered
by the Company that the Company proves were caused by the Bank's willful
misconduct, bad faith, or gross negligence or the Bank's willful failure to
pay under any Letter of Credit after the presentation to it by the
beneficiary of a sight draft and certificate(s) strictly complying with the
terms and conditions of a Letter of Credit.  In furtherance and not in
limitation of the foregoing: (i) the Bank may accept documents that appear
on their face to be in order, without responsibility for further
investigation, regardless of any notice or information to the contrary; and
(ii) the Bank shall not be responsible for the validity or sufficiency of
any instrument transferring or assigning or purporting to transfer or
assign a Letter of Credit or the rights or benefits thereunder or proceeds
thereof, in whole or in part, which may prove to be invalid or ineffective
for any reason.

          2.18 Obligations Absolute.

          The obligations of the Company under this Agreement and any L/C-
Related Document to reimburse the Bank for a drawing under a Letter of
Credit, and to repay any L/C Borrowing and any drawing under a Letter of
Credit converted into Revolving Loans, shall be unconditional and
irrevocable, and shall be paid strictly in accordance with the terms of
this Agreement and each such other L/C-Related Document under all
circumstances, including the following:

     (a)  any lack of validity or enforceability of this Agreement or any
L/C-Related Document;

     (b)  any change in the time, manner or place of payment of, or in any
other term of, all or any of the obligations of the Company in respect of
any Letter of Credit or any other amendment or waiver of or any consent to
departure from all or any of the L/C-Related Documents;

     (c)  the existence of any claim, set-off, defense or other right that
the Company may have at any time against any beneficiary or any transferee
of any Letter of Credit (or any Person for whom any such beneficiary or any
such transferee may be acting), the Bank or any other Person, whether in
connection with this Agreement, the transactions contemplated hereby or by
the L/C-Related Documents or any unrelated transaction;

     (d)  any draft, demand, certificate or other document presented under
any Letter of Credit proving to be forged, fraudulent, invalid or
insufficient in any respect or any statement therein being untrue or
inaccurate in any respect; or any loss or delay in the transmission or
otherwise of any document required in order to make a drawing under any
Letter of Credit;

     (e)  any payment by the Bank under any Letter of Credit against
presentation of a draft or certificate that does not strictly comply with
the terms of any Letter of Credit; or any payment made by the Bank under
any Letter of Credit to any Person purporting to be a trustee in
bankruptcy, debtor-in-possession, assignee for the benefit of creditors,
liquidator, receiver or other representative of or successor to any
beneficiary or any transferee of any Letter of Credit, including any
arising in connection with any Insolvency Proceeding;

     (f)  any exchange, release or non-perfection of any collateral, or any
release or amendment or waiver of or consent to departure from any other
guarantee, for all or any of the obligations of the Company in respect of
any Letter of Credit; or

     (g)  any other circumstance or happening whatsoever, whether or not
similar to any of the foregoing, including any other circumstance that
might otherwise constitute a defense available to, or a discharge of, the
Company or a guarantor.

          2.19 Cash Collateral Pledge.

          Upon the request of the Bank, if, as of the Revolving Termination
Date, any Letters of Credit may for any reason remain outstanding and
partially or wholly undrawn, then the Company shall immediately Cash
Collateralize the L/C Obligations in an amount equal to the aggregate
undrawn face amount of all Outstanding Letters of Credit. 

          2.20 Letter of Credit Fees.

     (a)  The Company shall pay the Bank a per annum fee ("Letter of Credit
Fee") on each Letter of Credit equal to the Letter of Credit Fee Percentage
in effect on the date of each quarterly calculation, computed on the
outstanding undrawn amount of such Letter of Credit as of the date the fee
is calculated, payable quarterly in advance on the Issuance Date and the
first day of each calendar quarter thereafter, and calculated on the basis
of a 360 day year.  Such fee shall be prorated if the term of a Letter of
Credit is less than one year.  If an Event of Default occurs under this
Agreement, at the option of the Bank, the amount of the fee shall be
increased by an additional 2.00% per annum during the continuance of such
Event of Default, commencing on the day the Bank provides notice of the
increase to the Company.

     (b)  The Company shall pay to the Bank from time to time on demand the
normal issuance, presentation, amendment and other processing fees, and
other standard costs and charges, of the Bank relating to letters of credit
as from time to time in effect.

          2.21 Uniform Customs and Practice.

          The Uniform Customs and Practice for Documentary Credits as
published by the International Chamber of Commerce most recently at the
time of issuance of any Letter of Credit shall (unless otherwise expressly
provided in the Letters of Credit) apply to the Letters of Credit.

                                ARTICLE III

                   TAXES, YIELD PROTECTION AND ILLEGALITY

          3.01 Taxes.

     (a)       (i)  If, as a result of the Company's actions, any taxes,
(other than income taxes imposed by the country or any state or subdivision
of the country in which the Bank's principal office or actual lending
office is located) are imposed on any payments under or in respect of this
Agreement or any instrument or agreement required hereunder including, but
not limited to, payments made pursuant to this Section, the Company shall
pay all such taxes and shall also pay to the Bank promptly all additional
amounts which are reasonably necessary to preserve the after-tax yield the
Bank would have received if such taxes had not been imposed.

               (ii) The additional amounts necessary to preserve the after-
tax yield the Bank would have received if such taxes had not been imposed
shall be calculated pursuant to the formula:

                         (w)(t)(i)
                    y = -------------
                         1-w-t

where the terms are defined as follows:

     y =  additional payment to be made to Bank

     w =  withholding tax rate levied by foreign government

     t =  the Bank's combined Federal and state tax rate

     i =  stated interest amount to be paid on credit (calculated using the
          applicable contract rate plus quoted spread)

     1 =  one

     (b)  All payments made to the Bank under this Agreement shall be net
of all applicable U.S. withholding taxes.

     (c)  The Company will provide the Bank with original tax receipts,
notarized copies of tax receipts, or such other documentation as will prove
payment of tax in a court of law applying the United States Federal Rules
of Evidence, for all taxes paid by the Company pursuant to subsection
3.01(a) above.  The Company will deliver receipts to the Bank within 30
days after the due date for the related tax.

     (d)  Nothing contained in this Section shall override any term or
provision of any Specified Swap Contract regarding withholding taxes
relating to Swap Contracts.

          3.02 Illegality.

     (a)  If, after the date of this Agreement, the Bank shall reasonably
determine that the introduction of any Requirement of Law, or any change in
any Requirement of Law or in the interpretation or administration thereof,
has made it unlawful, or that any central bank or other Governmental
Authority has asserted that it is unlawful, for the Bank or its Lending
Office to make Offshore Rate Loans, then, on notice thereof by the Bank to
the Company, the obligation of the Bank to make Offshore Rate Loans shall
be suspended until the Bank shall have notified the Company that the
circumstances giving rise to such determination no longer exists.

     (b)  If, after the date of this Agreement, the Bank shall reasonably
determine that it is unlawful to maintain any Offshore Rate Loan, the
Company shall prepay in full all Offshore Rate Loans of the Bank then
outstanding, together with interest accrued thereon, either on the last day
of the Interest Period thereof if the Bank may lawfully continue to
maintain such Offshore Rate Loans to such day, or immediately, if the Bank
may not lawfully continue to maintain such Offshore Rate Loans, together
with any amounts required to be paid in connection therewith pursuant to
Section 3.04.

     (c)  If the Company is required to prepay any Offshore Rate Loan
immediately as provided in subsection 3.02(b), then concurrently with such
prepayment, the Company may borrow from the Bank, in the amount of such
repayment, a Base Rate Loan.

     (d)  If the obligation of the Bank to make or maintain Offshore Rate
Loans has been so terminated or suspended, the Company may elect, by giving
notice to the Bank, that all Loans which would otherwise be made by the
Bank as Offshore Rate Loans shall be instead Base Rate Loans.

          3.03 Increased Costs and Reduction of Return.

     (a)  If the Bank shall determine that, due to either (i) the
introduction, after the date of this Agreement, of or any change in or in
the interpretation of any law or regulation or (ii) the compliance with any
guideline or request, made after the date of this Agreement, from any
central bank or other Governmental Authority (whether or not having the
force of law), there shall be any increase in the cost to the Bank of
agreeing to make or making, funding or maintaining any Offshore Rate Loans,
then the Company shall be liable for, and shall from time to time, upon
demand therefor by the Bank pay to the Bank additional amounts as are
sufficient to compensate the Bank for such increased costs; provided that
the Bank shall have given the Company prompt notice of such introduction,
guideline, or request, as applicable.

     (b)  If the Bank shall have determined that (i) the introduction,
after the date of this Agreement, of any Capital Adequacy Regulation, (ii)
any change, after the date of this Agreement, in any Capital Adequacy
Regulation, (iii) any change, after the date of this Agreement, in the
interpretation or administration of any Capital Adequacy Regulation by any
central bank or other Governmental Authority charged with the
interpretation or administration thereof, or (iv) compliance by the Bank
(or its Lending Office) or any corporation controlling the Bank, with any
Capital Adequacy Regulation enacted or adopted after the date of this
Agreement; affects or would affect the amount of capital required or
expected to be maintained by the Bank or any corporation controlling the
Bank and (taking into consideration the Bank's or such corporation's
policies with respect to capital adequacy and the Bank's desired return on
capital) the Bank determines in good faith that the amount of such capital
is increased as a consequence of its loans, credits or obligations under
this Agreement, then, upon demand of the Bank the Company shall immediately
pay to the Bank, from time to time as specified by the Bank, additional
amounts sufficient to compensate the Bank for such increase.  The Bank
agrees to give the Company prompt notice of any such Capital Adequacy
Regulation, change in Capital Adequacy Regulation, change in the
interpretation or administration of Capital Adequacy Regulation.

          3.04 Funding Losses.

          The Company agrees to reimburse the Bank and hold the Bank
harmless from any loss or expense which the Bank may sustain or incur as a
consequence of:

     (a)  The failure of the Company to make on a timely basis any payment
or prepayment of principal of any Offshore Rate Loan (including payments
made after any acceleration thereof);

     (b)  The failure of the Company to borrow, continue or convert a Loan
after the Company has given (or is deemed to have given) a Notice of
Borrowing or a Notice of Conversion/ Continuation;

     (c)  The failure of the Company to make any prepayment after the
Company has given a notice in accordance with Section 2.06;

     (d)  The prepayment (including pursuant to Section 2.07) or other
payment (including after acceleration thereof) of an Offshore Rate Loan on
a day that is not the last day of the relevant Interest Period; or

     (e)  The automatic conversion under Section 2.04 of any Offshore Rate
Loan to a Base Rate Loan on a day that is not the last day of the relevant
Interest Period;

including any such loss or expense arising from the liquidation or
reemployment of funds obtained by it to maintain its Offshore Rate Loans or
from fees payable to terminate the deposits from which such funds were
obtained.  For purposes of calculating amounts payable by the Company to
the Bank under this Section and under subsection 3.03(a), each Offshore
Rate Loan made by the Bank (and each related reserve, special deposit or
similar requirement) shall be conclusively deemed to have been funded at
the Offshore Rate for such Offshore Rate Loan by a matching deposit or
other borrowing in the interbank eurodollar market for a comparable amount
and for a comparable period, whether or not such Offshore Rate Loan is in
fact so funded.

          3.05 Inability to Determine Rates.

          If the Bank determines that for any reason adequate and
reasonable means do not exist for determining the Offshore Rate for any
requested Interest Period with respect to a proposed Offshore Rate Loan, or
that the Offshore Rate applicable pursuant to subsection 2.09(a) for any
requested Interest Period with respect to a proposed Offshore Rate Loan
does not adequately and fairly reflect the cost to the Bank of funding such
Loan, the Bank will promptly so notify the Company.  Thereafter, the
obligation of the Bank to make or maintain Offshore Rate Loans hereunder
shall be suspended until the Bank revokes such notice in writing.  Upon
receipt of such notice, the Company may revoke any Notice of Borrowing or
Notice of Conversion/Continuation then submitted by it.  If the Company
does not revoke such Notice, the Bank shall make, convert or continue the
Loans, as proposed by the Company, in the amount specified in the
applicable notice submitted by the Company, but such Loans shall be made,
converted or continued as Base Rate Loans instead of Offshore Rate Loans.

          3.06 Reserves on Offshore Rate Loans.

          The Company shall pay to the Bank, as long as the Bank shall be
required under regulations of the FRB to maintain reserves with respect to
liabilities or assets consisting of or including Eurocurrency funds or
deposits (currently known as "Eurocurrency liabilities"), additional costs
on the unpaid principal amount of each Offshore Rate Loan equal to the
actual costs of such reserves allocated to such Loan by the Bank (as
determined by the Bank in good faith, which determination shall be
conclusive), payable on each date on which interest is payable on such
Loan, provided the Company shall have received at least 15 days' prior
written notice of such additional costs from the Bank.  If the Bank fails
to give notice 15 days prior to the relevant Interest Payment Date, such
additional costs shall be payable 15 days from receipt of such notice.

          3.07 Survival.

          The agreements and obligations of the Company in this Article III
shall survive the payment of all other Obligations.

                                 ARTICLE IV

                            CONDITIONS PRECEDENT

          4.01 Conditions of Initial Loans.

          The obligation of the Bank (x) to Issue the first Standby Letter
of Credit after the date of this Agreement, and (y) to make its initial
Loan hereunder is subject to the condition that the Bank has received on or
before the Closing Date all of the following, in form and substance
satisfactory to the Bank:

     (a)  Credit Agreement.  This Agreement executed by each party thereto;

     (b)  Company Security Agreement.  The Company Security Agreement
executed by each party thereto;

     (c)  Evidence of Filings.  Evidence of all filings and lien searches
to perfect and establish the first priority liens created by the Company
Security Agreement;

     (d)  Resolutions; Incumbency.

          (1)  Copies of the resolutions of the board of directors of the
Company authorizing the transactions contemplated hereby, certified as of
the Closing Date by the Secretary or an Assistant Secretary of the Company;

          (2)  A certificate of the Secretary or Assistant Secretary of the
Company, certifying the names and true signatures of the officers of the
Company authorized to execute, deliver and perform, as applicable, this
Agreement, and all other Loan Documents to be delivered by it hereunder;

     (e)  Legal Opinion.  An opinion of Bernard L. Birkel, Secretary and
Managing Counsel -- Corporate, of the Company and addressed to the Bank, in
form and substance reasonably acceptable to the Bank;

     (f)  Payment of Fees.  Evidence of payment by the Company of all
accrued and unpaid fees, costs and expenses to the extent then due and
payable on the Closing Date, and all fees accrued through the Closing Date
under the Prior Credit Agreement, together with Attorney Costs of the Bank
to the extent invoiced prior to or on the Closing Date, plus such
additional amounts of Attorney Costs as shall constitute the Bank's
reasonable estimate of Attorney Costs incurred or to be incurred by it
through the closing proceedings (provided that such estimate shall not
thereafter preclude final settling of accounts between the Company and the
Bank) including any such costs, fees and expenses arising under or
referenced in Sections 2.10 and 9.04;

     (g)  Certificate.  A certificate signed by a Responsible Officer of
the Company, dated as of the Closing Date, stating that:

          (1)  the representations and warranties contained in Article V
are true and correct on and as of such date, as though made on and as of
such date;

          (2)  no Default or Event of Default exists or would result from
the making of the first Loan; and

          (3)  there has occurred since September 30, 1998, no event or
circumstance that has resulted or could reasonably be expected to result in
a Material Adverse Effect.

          4.02 Conditions to All Loans and Letters of Credit.

          The obligation of the Bank to make any Loan to be made by it
(including its initial Loan), to continue any Offshore Rate Loan or convert
any Loan into an Offshore Rate Loan, and to Issue any Letter of Credit
(including the initial Issuance) from and after the date of this Agreement
is subject to the satisfaction of the following conditions precedent on the
relevant Borrowing Date or Conversion/Continuation Date:

     (a)  Notice of Borrowing or Conversion/Continuation; L/C Application. 
The Bank shall have received a Notice of Borrowing,  Notice of
Conversion/Continuation, or a properly completed L/C Application for the
Issuance of a Letter of Credit, as applicable;

     (b)  Continuation of Representations and Warranties.  The
representations and warranties in Article V shall be true and correct on
and as of such Borrowing Date, Conversion/Continuation Date, or Issuance
Date with the same effect as if made on and as of such Borrowing Date,
Conversion/Continuation Date, or Issuance Date (except to the extent such
representations and warranties expressly refer to an earlier date, in which
case they shall be true and correct as of such earlier date);

     (c)  No Existing Default.  No Default or Event of Default shall exist
or shall result from the making of such Loan or its continuation or
conversion; or from the Issuance of such Letter of Credit;

     (d)  No Future Advance Notice.  The Bank shall not have received from
the Company any notice that any Collateral Document will no longer secure
on a first priority basis future advances or future Loans to be made or
extended, and Letters of Credit to be Issued under this Agreement; and

     (e)  Other Documents.  Such other approvals, opinions, documents or
materials as the Bank may reasonably request (each in form and substance
satisfactory to the Bank).

Each Notice of Borrowing, Notice of Conversion/Continuation with respect to
the continuation of or conversion into an Offshore Rate Loan, or L/C
Application submitted by the Company hereunder shall constitute a
representation and warranty by the Company hereunder, as of the date of
each such notice, as of each Borrowing Date, Conversion/Continuation Date,
or Issuance Date, as applicable, that the conditions in Section 4.02 are
satisfied.

          4.03 Conditions to Each Term Loan.

          The obligation of the Bank to make any Term Loan to be made by it
(including its initial Term Loan) is subject to the satisfaction of the
following conditions precedent on the relevant Borrowing Date:

     (a)  Deeds of Trust.  Unless previously delivered, the executed Deeds
of Trust (in form and substance reasonably satisfactory to the Bank),
executed by the Company, in appropriate form for recording, creating a Lien
upon the Timberlands; and

     (b)  Further Assurances.  The Company shall have taken all action
requested by the Bank pursuant to Section 6.15 with respect to the
Timberlands.

                                 ARTICLE V

                       REPRESENTATIONS AND WARRANTIES

          The Company represents and warrants to the Bank that, except as
disclosed in MGHI's Form 10-Q for the quarter ended September 30, 1998 or
the Schedules attached hereto:

          5.01 Corporate Existence and Power.

          The Company and each of its Subsidiaries:

     (a)  Is duly organized, validly existing and in good standing under
the laws of the jurisdiction of its incorporation or organization;

     (b)  Has the power and authority and all governmental licenses,
authorizations, consents and approvals to own its assets, carry on its
business and to execute, deliver, and perform its obligations under the
Loan Documents;

     (c)  Is duly qualified as a foreign corporation or other entity and is
licensed and in good standing under the laws of each jurisdiction where its
ownership, lease or operation of property or the conduct of its business
requires such qualification or license; and

     (d)  Is in compliance with all Requirements of Law; 

except, in each case referred to in clause (c) or clause (d), to the extent
that the failure to do so could not reasonably be expected to have a
Material Adverse Effect.

          5.02 Corporate Authorization; No Contravention.

          The execution, delivery and performance by the Company of this
Agreement and each other Loan Document to which the Company is party, have
been duly authorized by all necessary corporate action, and do not and will
not:

     (a)  Contravene the terms of any of the Company's Organization
Documents;

     (b)  Conflict with or result in any breach or contravention of, or the
creation of any Lien under, any document evidencing any material
Contractual Obligation to which the Company or any of its Subsidiaries is a
party or any order, injunction, writ or decree of any Governmental
Authority to which Company or any of its Subsidiaries or its property is
subject; or

     (c)  Violate, to the Company's knowledge, any Requirement of Law.

          5.03 Governmental Authorization.

          No approval, consent, exemption, authorization, or other action
by, or notice to, or filing with, any Governmental Authority (except for
recordings or filings in connection with the Liens granted to the Bank
under the Collateral Documents) is necessary or required to be obtained,
given, or filed by the Company in connection with the execution, delivery
or performance by, or enforcement against, the Company of this Agreement or
any other Loan Document.

          5.04 Binding Effect.

          This Agreement and each other Loan Document to which the Company
is a party constitute the legal, valid and binding obligations of the
Company, enforceable against the Company in accordance with their
respective terms, except as enforceability may be limited by applicable
bankruptcy, insolvency, or similar laws affecting the enforcement of
creditors' rights generally or by equitable principles relating to
enforceability.

          5.05 Litigation.

          Except as specifically disclosed in Schedule 5.05, there are no
actions, suits, proceedings, claims or disputes pending, or to the best
knowledge of the Company, threatened or contemplated, at law, in equity, in
arbitration or before any Governmental Authority, against the Company, or
its Subsidiaries or any of their respective properties which:

     (a)  Purport to affect or pertain to this Agreement or any other Loan
Document, or any of the transactions contemplated hereby or thereby; or

     (b)  Has a reasonable probability of being determined adversely to the
Company or its Subsidiaries and, if so determined, would reasonably be
expected to have a Material Adverse Effect.  No injunction, writ, temporary
restraining order or any order of any nature has been issued by any court
or other Governmental Authority purporting to enjoin or restrain the
execution, delivery or performance of this Agreement or any other Loan
Document, or directing that the transactions provided for herein or therein
not be consummated as herein or therein provided.

          5.06 No Default.

          No Default or Event of Default exists or would result from the
incurring of any Obligations by the Company or from the grant or perfection
of the Liens of the Bank on the Collateral.  As of the Closing Date,
neither the Company nor any Subsidiary of the Company is in default under
or with respect to any Contractual Obligation in any respect which,
individually or together with all such defaults, could reasonably be
expected to have a Material Adverse Effect, or that would, if such default
had occurred after the Closing Date, create an Event of Default under
subsection 8.01(d).

          5.07 ERISA Compliance.

          Except as specifically disclosed in Schedule 5.07:

     (a)  To the Company's knowledge, each Plan is in compliance in all
material respects with the applicable provisions of ERISA, the Code and
other federal or state law.  Each Plan which is intended to qualify under
Section 401(a) of the Code has received a favorable determination letter
from the IRS at the time of Plan adoption and to the best knowledge of the
Company, nothing has occurred which would cause the loss of such
qualification.  The Company and each ERISA Affiliate has made all required
contributions to any Plan subject to Section 412 of the Code, and no
application for a funding waiver or an extension of any amortization period
pursuant to Section 412 of the Code has been made with respect to any Plan
within the five plan years preceding the Closing Date.  In connection with
the foregoing, the PALCO Retirement Plan has been amended and restated as
of December 1, 1989, has been subsequently amended three times to date, and
received a favorable determination letter from the IRS dated January 10,
1996.

     (b)  There are no pending or, to the best knowledge of Company,
threatened claims, actions or lawsuits, or action by any Governmental
Authority, with respect to any Plan which has resulted or could reasonably
be expected to result in a Material Adverse Effect.  There has been no
prohibited transaction or violation of the fiduciary responsibility rules
with respect to any Plan which has resulted or could reasonably be expected
to result in a Material Adverse Effect.

     (c)  Within the five years preceding the Closing Date, (i) no ERISA
Event has occurred or is reasonably expected to occur; (ii) no Pension Plan
has any Unfunded Pension Liability that would reasonably be expected to
have a Material Adverse Effect; (iii) neither the Company nor any ERISA
Affiliate has incurred, or reasonably expects to incur, any liability under
Title IV of ERISA with respect to any Pension Plan (other than premiums due
and not delinquent under Section 4007 of ERISA); (iv) neither the Company
nor any ERISA Affiliate has incurred, or reasonably expects to incur, any
liability (and no event has occurred which, with the giving of notice under
Section 4219 of ERISA, would result in such liability) under Section 4201
or 4243 of ERISA with respect to a Multiemployer Plan; and (v) neither the
Company nor any ERISA Affiliate has engaged in a transaction that could be
reasonably be expected to be subject to Section 4069 or 4212(c) of ERISA.

          5.08 Use of Proceeds; Margin Regulations.

          The proceeds of the Loans are to be used solely for the purposes
set forth in and permitted by Section 6.12 and Section 7.07.  Neither the
Company nor any Subsidiary of the Company is generally engaged in the
business of purchasing or selling Margin Stock or extending credit for the
purpose of purchasing or carrying Margin Stock.

          5.09 Title to Properties.

          The Company and each of its Subsidiaries have good record and
marketable title in fee simple to, or valid leasehold interests in, all
real property necessary or used in the ordinary conduct of their respective
businesses, except for such defects in title as could not, individually or
in the aggregate, have a Material Adverse Effect.  As of the Closing Date,
the property of the Company and its Subsidiaries is subject to no Liens,
other than Permitted Liens.

          5.10 Taxes.

          The Company and its Subsidiaries have filed all Federal and other
material tax returns and reports required to be filed, and have paid all
Federal and other material taxes, assessments, fees and other governmental
charges levied or imposed upon them or their properties, income or assets
otherwise due and payable, except those which are being contested in good
faith by appropriate proceedings and for which adequate reserves have been
provided in accordance with GAAP. There is no proposed tax assessment
against the Company or any of its Subsidiaries that would, if made, have a
Material Adverse Effect.

          5.11 Financial Condition.

     (a)  The audited consolidated financial statements of the Company and
its Subsidiaries dated December 31, 1997, and the related consolidated
statements of income or operations, shareholders' equity or members'
capital and cash flows for the fiscal year ended on that date and the
unaudited quarterly financial statements of the Company and its
Subsidiaries dated September 30, 1998, and the related consolidated
statements of income or operations, shareholders' equity or members'
capital and cash flows for the fiscal quarters ended on that date;

          (1)  Were prepared in accordance with GAAP consistently applied
throughout the period covered thereby, except as otherwise expressly noted
therein, subject, in the case of the quarterly financial statements, to
ordinary, good faith year-end audit adjustments;

          (2)  Are, in all material respects, complete and accurate, and
fairly present the financial condition of the Company and its Subsidiaries
as of the date thereof and results of operations for the period covered
thereby; and

          (3)  Show all material indebtedness and other liabilities, direct
or contingent, of the Company and its consolidated Subsidiaries as of the
date thereof, including liabilities for taxes, material commitments and
Contingent Obligations.

     (b)  Since September 30, 1998, there has been no Material Adverse
Effect.

          5.12 Environmental Matters.

     (a)  Except as specifically disclosed in Schedule 5.12, the on-going
operations of the Company and each of its Subsidiaries comply in all
respects with all Environmental Laws, except such non-compliance which
would not (if enforced in accordance with applicable law) reasonably be
expected to result in liability which would cause a Material Adverse
Effect;

     (b)  Except as specifically disclosed in Schedule 5.12, the Company
and each of its Subsidiaries have obtained all material licenses, permits,
authorizations and registrations required under any Environmental Law
("Environmental Permits") and necessary for their respective ordinary
course operations, all such material Environmental Permits are in good
standing, and the Company and each of its Subsidiaries are in compliance
with all material terms and conditions of such Environmental Permits.

     (c)  Except as specifically disclosed in Schedule 5.12, none of the
Company, any of its Subsidiaries or any of their respective present
property or operations, is subject to any outstanding written order from or
agreement with any Governmental Authority, nor subject to any judicial or
docketed administrative proceeding, respecting any Environmental Law,
Environmental Claim or Hazardous Material, the non-compliance with which
could be reasonably be expected to have a Material Adverse Effect.

     (d)  Except as specifically disclosed in Schedule 5.12, there are no
Hazardous Materials or other conditions or circumstances existing with
respect to any property of the Company or any of its Subsidiaries, or
arising from operations prior to the Closing Date, of the Company or any of
its Subsidiaries that would reasonably be expected to give rise to
Environmental Claims for any such condition, circumstance or property that
could reasonably be expected to have a Material Adverse Effect.  In
addition, to the best of the Company's knowledge, (i) neither the Company
nor any of its Subsidiaries has any underground storage tanks (x) that are
not properly registered or permitted in all material respects under
applicable Environmental Laws, or (y) that are leaking or disposing of
Hazardous Materials off-site in a manner that could reasonably be expected
to cause a Material Adverse Effect, and (ii) the Company and its
Subsidiaries have notified all of their employees of the existence, if any,
of any health hazard arising from the conditions of their employment and
have met all notification requirements under Title III of CERCLA and all
other Environmental Laws.

          5.13 Collateral Documents.

     (a)  The provisions of each of the Collateral Documents are effective
to create in favor of the Bank, a legal, valid and enforceable first
priority security interest in all right, title and interest of the Company
in the collateral described therein.

     (b)  Each Deed of Trust when delivered will be effective to grant to
the Bank a legal, valid and enforceable deed of trust/mortgage lien on all
the right, title and interest of the mortgagor under such Deed of Trust in
the Mortgaged Property described therein.  When each such Deed of Trust is
duly recorded in the offices listed on the schedule to such Deed of Trust
and the mortgage recording fees and taxes in respect thereof are paid and
compliance is otherwise had with the formal requirements of state law
applicable to the recording of real estate mortgages generally, each such
mortgaged property, subject to the encumbrances and exceptions to title set
forth therein and except as noted in the title policies delivered to the
Bank pursuant to Section 4.03, is subject to a legal, valid, enforceable
and perfected first priority deed of trust; and when financing statements
have been filed in the offices specified in such Deed of Trust, such Deed
of Trust also creates a legal, valid, enforceable and perfected first lien
on, and security interest in, all right, title and interest of the Company
under such Deed of Trust in all personal property and fixtures which is
covered by such Deed of Trust, subject to no other Liens, except the
encumbrances and exceptions to title set forth therein and except as noted
in the title policies delivered to the Bank pursuant to Section 4.03 and
Permitted Liens.

     (c)  All representations and warranties of the Company contained in
the Collateral Documents are true and correct.

          5.14 Regulated Entities.

          None of the Company, any Person controlling the Company, or any
Subsidiary of the Company, is (a) an "Investment Company" within the
meaning of the Investment Company Act of 1940; or (b) subject to regulation
under the Public Utility Holding Company Act of 1935, the Federal Power
Act, the Interstate Commerce Act, any state public utilities code, or any
other Federal or state statute or regulation limiting its ability to incur
Indebtedness.

          5.15 No Burdensome Restrictions.

          Neither the Company nor any of its Subsidiaries is a party to or
bound by any Contractual Obligation, or subject to any restriction in any
Organization Document, or any Requirement of Law, which could reasonably be
expected to have a Material Adverse Effect.

          5.16 Subsidiaries.

          As of the Closing Date, the Company has no Subsidiaries other
than those specifically disclosed in part (a) of Schedule 5.16 hereto and
has no material equity investments in any other corporation or entity other
than those specifically disclosed in part (b) of Schedule 5.16.

          5.17 Insurance.

          The properties of the Company and its Subsidiaries are insured
with financially sound and reputable insurance companies, and to the
knowledge of the Company, in such amounts, with such deductibles and
covering such risks as are customarily carried by companies engaged in
similar businesses and owning similar properties in localities where the
Company or such Subsidiary operates.

          5.18 Solvency.

          The Company and SPC are each Solvent.

          5.19 Swap Obligations.

     (a)  As of the Closing Date, neither the Company nor any of its
Subsidiaries has incurred any outstanding obligations under any Swap
Contracts.  With respect to any Swap Contracts that may be entered into by
the Company after the Closing Date, the Company represents and warrants
that it has undertaken its own independent assessment of its consolidated
assets, liabilities and commitments and has considered appropriate means of
mitigating and managing risks associated with such matters and has not
relied on any Swap Provider or any Affiliate of any Swap Provider, swap
counterparty or any Affiliate of any swap counterparty, in determining
whether to enter into any Swap Contract.

     (b)  The Company has not entered into any master agreement relating to
Swap Contracts and under which termination values resulting from Swap
Contracts that are Specified Swap Contracts are nettable against
termination values resulting from Swap Contracts that are not Specified
Swap Contracts unless only Specified Swap Contracts are outstanding under
such master agreement.

     (c)  None of the Subsidiaries of the Company has entered into any Swap
Contracts other than as disclosed in the SEC filings of SPC.

          5.20 Full Disclosure.

          None of the representations or warranties made by the Company in
the Loan Documents as of the date such representations and warranties are
made or deemed made, and none of the statements contained in any exhibit,
report, statement or certificate furnished by or on behalf of the Company
in connection with the Loan Documents, contains any untrue statement of a
material fact or omits any material fact required to be stated therein or
necessary to make the statements made therein, in light of the
circumstances under which they are made, not misleading as of the time when
made or delivered.

          5.21 Labor Relations.

          There are no material strikes, lockouts or other labor disputes
against the Company or any of its Subsidiaries, or , to the best of the
Company's knowledge, threatened against or affecting the Company or any of
its Subsidiaries, and no significant unfair labor practice complaint is
pending against the Company or any of its Subsidiaries or, to the best
knowledge of the Company, threatened against any of them before any
Governmental Authority.

          5.22 Compliance with Laws.

          The Company has complied in all material respects with all
federal, state, and local laws, rules, and regulations applicable to the
business of the Company including, but not limited to, laws regulating the
Company's sales or the furnishing of services to Receivable Debtors and
disclosures in connection therewith.

          5.23 Merchantable Inventory.

          All inventory which is included in the Borrowing Base is of good
and merchantable quality in all material respects.

          5.24 Location of the Company.

          On the Closing Date, the Company's place of business (or, if the
Company has more than one place of business, its chief executive office) is
located at 125 Main Street, Scotia, California.

          5.25 Y2K.

          The Company has (i) initiated a review and assessment of all
areas within its and each of its Restricted Subsidiaries' business and
operations (including those affected by suppliers and vendors) that could
be adversely affected by the "Year 2000 Problem" (that is, the risk that
computer applications used by the Company or any of its Restricted
Subsidiaries or its material suppliers and vendors) may be unable to
recognize and perform properly date-sensitive functions involving certain
dates prior to and any date after December 31, 1999), (ii) developed a plan
and timeline for addressing the Year 2000 Problem on a timely basis, and
(iii) to date, implemented that plan in accordance with that timetable. 
The Company reasonably believes that all computer applications (including
those of its material suppliers and vendors) that are material to its or
any of its Restricted Subsidiaries' business and operations will on a
timely basis be able to perform properly date-sensitive functions for all
dates before and after January 1, 2000 (that is, be "Year 2000 Compliant"),
except to the extent that a failure to do so could not reasonably be
expected to have a Material Adverse Effect.

                                 ARTICLE VI

                           AFFIRMATIVE COVENANTS

          The Company covenants and agrees that, so long as the Bank shall
have any commitment to extend credit hereunder, or any Loan, L/C
Obligation, or other outstanding monetary Obligation shall remain unpaid or
unsatisfied, unless the Bank waives compliance in writing: 

          6.01 Financial Statements.

          The Company shall deliver to the Bank, in form and detail
satisfactory to the Bank:

     (a)  As soon as available, but not later than 105 days after the end
of each fiscal year, a copy of the audited consolidated balance sheets of
MGHI and SPC as at the end of such year and the related consolidated
statements of income, shareholders' equity or members' capital and cash
flows for such fiscal year, setting forth in each case in comparative form
the figures for the previous year, and accompanied by the opinion of a
nationally-recognized independent public accounting firm which report shall
state that such consolidated financial statements present fairly the
financial position for the periods indicated in conformity with GAAP;

     (b)  As soon as available, but not later than 105 days after the end
of each fiscal year, a copy of the consolidated balance sheet of the
Company as at the end of such year and the related consolidated statements
of income, shareholders' equity and cash flows for such fiscal year,
setting forth in each case in comparative form the figures for the previous
year, together with written confirmation that such financial statements
have been reviewed by the independent public accounting firm that prepared
the audited financial statements being simultaneously delivered pursuant to
subsection 6.01(a);

     (c)  (i) As soon as available, but not later than 60 days after the
end of each of the first three fiscal quarters of each year, the unaudited
consolidated balance sheets of  MGHI and SPC and the related consolidated
statements of income, shareholders' equity or members' capital and cash
flows for such Persons for such fiscal quarter, all certified by an
appropriate Responsible Officer of MGHI and SPC, respectively, as having
been used or as shall be used in connection with the preparation of the
financial statements referred to in subsections 6.01(a); and (ii) as soon
as available, but not later than 60 days after the end of each fiscal
quarter, on an Unconsolidated Basis, the unaudited balance sheet of the
Company at the end of such quarter and the related statements of income,
shareholders' equity and cash flows for the Company on an Unconsolidated
Basis for the year to date ending such fiscal quarter, each certified by a
Responsible Officer of the Company as having been used or as shall be used
in connection with the preparation of the financial statements referred to
in subsection 6.01(b);

     (d)  Within 45 days after the end of each monthly accounting period,
and as of the last day of such period, Company-prepared financial
statements for the Company for such month in form consistent with prior
practice;

     (e)  Promptly upon each request of Bank, such other statements, lists
of property and accounts, budgets, forecasts or reports as to the Company
as Bank may reasonably request;

          6.02 Certificates; Other Information.

          The Company shall furnish to the Bank:

     (a)  Concurrently with the delivery of the financial statements
referred to in subsections 6.01(a) and (b) above, a Compliance Certificate
executed by a Responsible Officer of the Company;

     (b)  Within 45 days after the end of each monthly accounting period,
and as of the last day of such period:

          (1)  A Borrowing Base Certificate;

          (2)  A description of lumber and log inventories with book and
market value;

          (3)  Statements showing an aging and reconciliation of
Receivables;

     (c)  Promptly after the same are sent, copies of all financial
statements and reports which the Company sends to its public shareholders,
if any; and promptly after the same are filed, copies of all financial
statements and regular, periodical or special reports which the Company may
make to, or file with, the SEC or any similar Governmental Authority; and 

     (d)  On or before each March 31, the following prepared on a
consolidated basis (which information shall be considered as confidential
information pursuant to Section 9.09, whether or not identified as
"confidential" or "secret"):

          (1)  The Company's annual business plan, and if requested by
Bank, the Company's key operating assumptions, such as timber harvest
volumes, log consumption and lumber production, wood product shipments,
projected prices of logs, lumber and other products sold by the Company,
capital expenditures, and expected debt repayments and/or borrowings.  The
Company agrees to meet with the Bank, at least once a year, to discuss the
foregoing matters;

          (2)  The Company's "Category of species and inventory of timber",
the annual harvest plan indicating timber harvest volumes by major
categories, and a listing of approved timber harvest plans;

     (e)  Within the 60 day period commencing on the first day of each
calendar quarter, an updated status report of the Company's approved timber
harvest plans (which information shall be considered as confidential
information pursuant to Section 9.09, whether or not identified as
"confidential" or "secret");

     (f)  Promptly, such additional business, financial, corporate affairs
and other information as the Bank may from time to time reasonably request
(which information shall be considered as confidential information pursuant
to Section 9.09, whether or not identified as "confidential" or "secret").

          6.03 Notices.

          The Company shall promptly notify the Bank:

     (a)  Of the occurrence of any Default or Event of Default, and of the
occurrence or existence of any event or circumstance that foreseeably will
become a Default or Event of Default;

     (b)  Of (i) any breach or non-performance of, or any default under,
any Contractual Obligation of the Company or any of its Subsidiaries which
could reasonably be expected to result in a Material Adverse Effect; and
(ii) any dispute, litigation, investigation, proceeding or suspension which
may exist at any time between the Company or any of its Subsidiaries and
any Governmental Authority which could reasonably be expected to result in
a Material Adverse Effect;

     (c)  Of the commencement of, or any material adverse development in,
any litigation or proceeding affecting the Company or any Subsidiary of the
Company which, if adversely determined, would reasonably be expected to
have a Material Adverse Effect, or in which the relief sought is an
injunction or other stay of the performance of this Agreement or any Loan
Document (such obligation to give notice shall be deemed satisfied by the
Company giving the Bank, pursuant to Section 6.02(c), the reports
containing the required information furnished by the Company, MGHI, or SPC
to the SEC);

     (d)  Promptly upon becoming aware of any of the following that could
reasonably be expected to have a Material Adverse Effect:  (i) any and all
enforcement, cleanup, removal or other governmental or regulatory actions
instituted, completed or threatened against the Company or any of its
Subsidiaries or any of their respective properties pursuant to any
applicable Environmental Laws, (ii) all other Environmental Claims, and
(iii) any environmental or similar condition on any real property adjoining
or in the vicinity of the property of the Company or any of its
Subsidiaries that could reasonably be anticipated to cause such property or
any part thereof to be subject to any restrictions on the ownership,
occupancy, transferability or use of such property under any Environmental
Laws;

     (e)  Of any other litigation or proceeding affecting the Company or
any of its Subsidiaries which the Company, MGHI, or SPC would be required
to report to the SEC pursuant to the Exchange Act, promptly after reporting
the same to the SEC;

     (f)  Of any of the following events affecting the Company, together
with a copy of any notice with respect to such event that may be required
to be filed with a Governmental Authority and any notice delivered by a
Governmental Authority to the Company with respect to such event:

          (1)  An ERISA Event;

          (2)  If any of the representations and warranties in Section 5.07
ceases to be true and correct in any material respect;

          (3)  The adoption of any new Pension Plan or other Plan subject
to Section 412 of the Code;

          (4)  The adoption of any amendment to a Pension Plan or other
Plan subject to Section 412 of the Code, if such amendment results in a
material increase in contributions or Unfunded Pension Liability; or

          (5)  The commencement of contributions to any Pension Plan or
other Plan subject to Section 412 of the Code;

     (g)  Any Material Adverse Effect subsequent to the date of the most
recent audited financial statements of the Company delivered to the Banks
pursuant to subsection 6.01(a);

     (h)  Of any material change in accounting policies or financial
reporting practices by the Company or any of its Subsidiaries;

     (i)  Of any labor controversy resulting in or which could reasonably
be expected to result in any strike, work stoppage, boycott, shutdown or
other labor disruption against or involving the Company or any of its
Subsidiaries;

     (j)  Of any change in the Company's name, business or legal structure,
place of business, or chief executive office if the Company has more than
one place of business; each such notice to be given in writing and not less
than 45 days prior to such change;

     (k)  Of the entry by the Company into any Specified Swap Contract,
together with the details thereof;

     (l)  Of the occurrence of any default, event of default, termination
event or other event under any Specified Swap Contract that after the
giving of notice, passage of time or both, would permit either counterparty
to such Specified Swap Contract to terminate early any or all trades
relating to such contract.

          Each notice under this Section shall be accompanied by a written
statement by a Responsible Officer of the Company setting forth details of
the occurrence referred to therein, and stating what action the Company or
any affected Subsidiary of the Company proposes to take with respect
thereto and at what time.  Each notice under subsection 6.03(a) shall
describe with particularity any and all clauses or provisions of this
Agreement or other Loan Document that have been (or foreseeably will be)
breached or violated.

          6.04 Preservation of Corporate Existence, Etc.

          The Company shall, and shall cause each of its Restricted
Subsidiaries to:

     (a)  Preserve and maintain in full force and effect its legal
existence and good standing under the laws of its state or jurisdiction of
organization (other than as to Restricted Subsidiaries other than SPC whose
dissolution could not reasonably be expected to cause a Material Adverse
Effect);

     (b)  Preserve and maintain in full force and effect all material
rights, privileges, qualifications, permits, licenses and franchises
necessary or desirable in the ordinary course of business except in
connection with transactions permitted by Section 7.03 and dispositions of
assets permitted by Section 7.02;

     (c)  Use reasonable efforts, in the ordinary course of business, to
preserve its business organization and preserve the goodwill and business
of the customers, suppliers, and others having material business relations
with it.

          6.05 Maintenance of Property.

          The Company shall maintain, and shall cause each of its
Subsidiaries to maintain, and preserve all its property which is used or
useful in its business in good working order and condition, ordinary wear
and tear excepted and make all necessary repairs thereto and renewals and
replacements thereof except where the failure to do so could not reasonably
be expected to have a Material Adverse Effect, except as permitted by
Section 7.02.  The Company and each Subsidiary of the Company shall use the
standard of care typical in the industry in the operation and maintenance
of its facilities and in the care and preservation of the Timberlands.

          6.06 Insurance.

     (a)  In addition to insurance requirements set forth in the Collateral
Documents, the Company shall maintain and shall cause each of its
Subsidiaries to maintain, with financially sound and reputable independent
insurers, insurance with respect to its properties and business against
loss or damage of the kinds customarily insured against by Persons engaged
in the same or similar business, of such types and in such amounts as are
customarily carried under similar circumstances by such other Persons;
including workers' compensation insurance, comprehensive general liability
and property insurance.  The Company may self-insure any or all Workers'
Compensation liabilities.

     (b)  To the extent that any of the insurance required by this clause
ceases to be available at commercially reasonable rates, the Company may
effect substitute insurance coverage therefor in accordance with the
prudent standards then being followed by other companies engaged in the
same or similar business or having comparable properties.  In the event
that the Company wishes to effect substitute coverage pursuant to the
foregoing proviso, it will notify the Bank of such intent as soon as
reasonably practicable, and not less than five Business Days prior to the
termination of the coverage for which substitution is to be made, furnish
the Bank with a report describing in reasonable detail the nature of such
substitute coverage and the reasons why the Company believes that such
substitute coverage is appropriate.

     (c)  Upon request of the Bank, the Company shall furnish the Bank at
reasonable intervals (but not more than once per calendar year) a
certificate of a Responsible Officer of the Company or any insurance broker
of the Company setting forth the nature and extent of all insurance
maintained by the Company and its Subsidiaries in accordance with this
Section or any Collateral Documents (and which, in the case of a
certificate of a broker, were placed through such broker).

          6.07 Payment of Obligations.

          With only such exceptions as could not reasonably be expected to
have a Material Adverse Effect, the Company shall, and shall cause its
Subsidiaries to, pay and discharge as the same shall become due and
payable, all their respective obligations and known liabilities, including:

     (a)  All tax liabilities, assessments and governmental charges or
levies upon it or its properties or assets, unless the same are being
contested in good faith by appropriate proceedings and adequate reserves in
accordance with GAAP are being maintained by the Company or such
Subsidiary;

     (b)  All lawful claims which, if unpaid, would by law become a Lien
upon its property unless such claims are contested in good faith by
appropriate proceedings and adequate reserves in accordance with GAAP are
being maintained by the Company and such Subsidiaries;

     (c)  All Indebtedness, as and when due and payable, but subject to any
subordination provisions contained in any instrument or agreement
evidencing such Indebtedness; and

     (d)  All Obligations.

          6.08 Compliance with Laws.

          The Company shall comply, and shall cause each of its
Subsidiaries to comply, in all material respects with all Requirements of
Law of any Governmental Authority having jurisdiction over it or its
business (including the Federal Fair Labor Standards Act), except such as
may be contested in good faith or as to which a bona fide dispute may
exist.

          6.09 Compliance with ERISA.

          The Company shall, and to the fullest extent permitted by
applicable law shall cause each of its ERISA Affiliates to:  (a) maintain
each Plan in compliance in all material respects with the applicable
provisions of ERISA, the Code and other federal or state law; (b) cause
each Plan which is qualified under Section 401(a) of the Code to maintain
such qualification; and (c) make all required contributions to any Plan
subject to Section 412 of the Code.

          6.10 Inspection of Property and Books and Records.

          The Company shall maintain and shall cause each of its
Subsidiaries to maintain proper books of record and account, in which full,
true and correct entries in conformity with GAAP consistently applied shall
be made of all financial transactions and matters involving the assets and
business of the Company and such Subsidiary.  The Company shall permit, and
shall cause each of its Subsidiaries to permit, representatives of the Bank
to visit, inspect, and audit any of their respective properties, to examine
their respective corporate, financial and operating records, and make
copies thereof or abstracts therefrom, and to discuss their respective
affairs, finances and accounts with their respective directors, officers,
and independent public accountants, all at the expense of the Company and
at such reasonable times during normal business hours and as often as may
be reasonably desired, upon reasonable advance notice to the Company;
provided, however, when an Event of Default exists the Bank may do any of
the foregoing at the expense of the Company at any time during normal
business hours and without advance notice.

          6.11 Environmental Laws.

     (a)  The Company shall, and shall cause each of its Subsidiaries to,
conduct its operations and keep and maintain its property in compliance in
all material respects with all applicable Environmental Laws, except such
as may be contested in good faith by appropriate proceedings or as to which
a bona fide dispute may exist and resolution of which is being sought by
appropriate proceedings.

     (b)  Upon the written request of the Bank, the Company shall submit
and cause each of its Subsidiaries to submit, to the Bank, at the Company's
sole cost and expense, at reasonable intervals, a report providing an
update of the status of any environmental, health or safety compliance,
hazard or liability issue identified in any notice or report required
pursuant to subsection 6.03(d), that could, individually or in the
aggregate, result in liability having a Material Adverse Effect.

          6.12 Use of Proceeds.

          The Company shall use the proceeds of the Revolving Loans for
working capital and other general corporate purposes and the proceeds of
the Term Loans to pay for the Acquisition Cost of Timberlands and in each
case, not in contravention of any Requirement of Law or of any Loan
Document.

          6.13 Solvency.

          The Company shall at all times be, and shall cause SPC to be,
Solvent.

          6.14 Protection of Collateral; Access.

          The Company shall take all steps reasonably necessary or
advisable to preserve and protect the Collateral (including all of the
Timberlands covered by Collateral Documents) and ensure that the Bank's
rights and access to and interests in the Collateral are not in any way
materially impaired or adversely affected.

          6.15 Further Assurances.

     (a)  The Company shall ensure that all written information, exhibits
and reports furnished to the Bank do not and will not contain any untrue
statement of a material fact and do not and will not omit to state any
material fact or any fact necessary to make the statements contained
therein not misleading in light of the circumstances in which made, and
will promptly disclose to the Bank and correct any defect or error that may
be discovered therein or in any Loan Document or in the execution,
acknowledgement or recordation thereof.

     (b)  In connection with or at any time following the execution and
delivery of any Deeds of Trust hereunder, the Company will provide the Bank
with such of the following as the Bank may request:

          (1)  Evidence satisfactory to the Bank that there has been filed,
registered, or recorded all filings, registrations and recordings necessary
and advisable to grant the Liens under the Deeds of Trust in favor of the
Bank in accordance with applicable law;

          (2)  Written advice relating to such Liens and judgment searches
as the Bank shall have reasonably requested, and such documents as may be
necessary to confirm that the Collateral is subject to no other Liens in
favor of any Persons (other than Permitted Liens);

          (3)  Performance of all other actions necessary or, in the
reasonable opinion of the Bank, desirable to perfect and protect the first
priority security interest or Lien created by the Deeds of Trust;

          (4)  With respect to the Mortgaged Property, an A.L.T.A. Form B
(or other form acceptable to the Bank, provided that such form does not
require a survey) mortgagee policy of title insurance or a binder issued by
a title insurance company reasonably satisfactory to the Bank insuring (or
undertaking to insure, in the case of a binder) that the Deed of Trust
creates and constitutes a valid first Lien against the Mortgaged Property
in favor of the Bank, subject only to exceptions reasonably acceptable to
the Bank, with such endorsements and affirmative insurance as the Bank may
reasonably request;

          (5)  Such consents, estoppels, subordination agreements and other
documents and instruments executed by landlords, tenants and other Persons
party to material contracts relating to any Collateral as to which the Bank
shall be granted a Lien pursuant to any Deed of Trust as reasonably
requested by the Bank (in all instances in form and substance reasonably
satisfactory to the Bank); and

          (6)  Performance of all other actions necessary or, in the
reasonable opinion of the Bank, desirable to perfect and protect the first
priority Lien created by the Deeds of Trust and to enhance the Bank's
ability to preserve and protect its interests in and access to the
Collateral pursuant to any Deed of Trust.

     (c)  If required by the Bank, the Company will obtain a Phase I
environmental site assessment, in form and detail reasonably satisfactory
to the Bank, with respect to any real property as to which the Bank is
granted a Lien, dated as of a recent date prior to the disbursement date of
the Term Loan to which it is related, prepared by a qualified firm
reasonably acceptable to the Bank, stating, among other things, that based
upon an investigation, the scope of which is reasonably satisfactory to the
Bank, such real property is free from Hazardous Materials and that
operations conducted thereon are in compliance with all Environmental Laws
(other than the Endangered Species Act (16 U.S.C. Section 1531 et seq.),
the Migratory Bird Treaty Act (16 U.S.C. 703 et seq.), the Forest and
Rangeland Renewable Resources Act of 1974, the National Forest Management
Act of 1976, the Z'berg-Nejedly Forest Practices Act of 1973 and the
California Public Resources Code) and if not free from Hazardous Materials,
showing any Estimated Remediation Costs.  For purposes of this subsection,
"Estimated Remediation Costs" means all costs associated with performing
work to remediate contamination of real property or groundwater, including
engineering and other professional fees and expenses, costs to remove,
transport and dispose of contaminated soil, costs to "cap" or otherwise
contain contaminated soil, and costs to pump and treat water and monitor
water quality;

     (d)  Upon request by the Bank, the Company will provide a certificate
executed by a Responsible Officer of the Company, showing the age class
distribution and estimated timber volume (by Mbf) in each age class, of the
trees growing on the land encumbered by the Deeds of Trust.

     (e)  Promptly upon request by the Bank, the Company shall do, execute,
acknowledge, deliver, record, re-record, file, re-file, register and
re-register, any and all such further acts, deeds, conveyances, security
agreements, mortgages, assignments, estoppel certificates, financing
statements and continuations thereof, termination statements, notices of
assignment, transfers, certificates, assurances and other instruments the
Bank may reasonably require from time to time in order (i) to carry out
more effectively the purposes of this Agreement or any other Loan Document,
(ii) to subject to the Liens created by any of the Collateral Documents any
of the properties, rights or interests covered by any of the Collateral
Documents, (iii) to perfect and maintain the validity, effectiveness and
priority of any of the Collateral Documents and the Liens intended to be
created thereby, and (iv) to better assure, convey, grant, assign,
transfer, preserve, protect and confirm to the Bank the rights granted or
now or hereafter intended to be granted to the Bank under any Loan Document
or under any other document executed in connection therewith.

                                ARTICLE VII

                             NEGATIVE COVENANTS

          The Company hereby covenants and agrees that, so long as the Bank
shall have any commitment to extend credit hereunder, or any Loan, L/C
Obligation, or other outstanding monetary Obligation shall remain unpaid or
unsatisfied, unless the Bank waives compliance in writing:

          7.01 Limitation on Liens.

          The Company shall not, and shall not suffer or permit any of its
Restricted Subsidiaries to, directly or indirectly, make, create, incur,
assume or suffer to exist any Lien upon or with respect to any part of its
property, whether now owned or hereafter acquired, other than the following
("Permitted Liens"):

     (a)  Any Lien (other than Liens on the Collateral) existing on the
property of the Company or its Subsidiaries on the Closing Date and set
forth in Schedule 7.01 securing Indebtedness outstanding on such date or
refinancings thereof provided that each such refinancing of an Indebtedness
shall not result in any of the following:  (1) an increase in the interest
rate and/or the then outstanding principal amount of the Indebtedness being
refinanced, (2) any additional assets of the Company or any of its
Restricted Subsidiaries securing the Indebtedness being refinanced, (3) the
Company or any Restricted Subsidiary incurring any Guaranty Obligation in
connection therewith; and (4) an increase, during the term of this
Agreement and for one year thereafter, in the principal payments of the
Indebtedness being refinanced, and (5) any restriction on the ability of
the Company to perform its obligations under this Agreement and any other
Loan Document;

     (b)  Any Lien created under any Loan Document;

     (c)  Liens for taxes, fees, assessments or other governmental charges
which are not delinquent or remain payable without penalty, or to the
extent that non-payment thereof is permitted by Section 6.07, provided that
no Notice of Lien has been filed or recorded.  For purposes of this
subsection, "Notice of Lien" means any "notice of lien" or similar document
intended to be filed or recorded with any court, registry, recorder's
office, central filing office or other Governmental Authority for the
purpose of evidencing, creating, perfecting or preserving the priority of a
Lien securing obligations owing to a Governmental Authority;

     (d)  Carriers', warehousemen's, mechanics', landlords', materialmen's,
repairmen's or other similar Liens arising in the ordinary course of
business which are not delinquent or remain payable without penalty or
which are being contested in good faith and by appropriate proceedings,
which proceedings have the effect of preventing the forfeiture or sale of
the property subject thereto;

     (e)  Liens (other than any Lien imposed by ERISA) consisting of
pledges or deposits required in the ordinary course of business in
connection with workers' compensation, unemployment insurance and other
social security legislation;

     (f)  Liens (other than Liens on the Collateral) on the property of the
Company or any of its Restricted Subsidiaries securing (i) the non-
delinquent performance of bids, trade contracts (other than for borrowed
money), leases, statutory obligations, (ii) contingent obligations on
surety and appeal bonds, and (iii) other non-delinquent obligations of a
like nature; in each case, incurred in the ordinary course of business,
provided all such Liens in the aggregate would not (even if enforced) cause
a Material Adverse Effect;

     (g)  Liens (other than Liens on the Collateral) consisting of judgment
or judicial attachment liens, provided that the enforcement of such Liens
is effectively stayed;

     (h)  Easements, rights-of-way, restrictions and other similar
encumbrances incurred in the ordinary course of business which, in the
aggregate, are not substantial in amount, and which do not in any case
materially detract from the value of the property subject thereto or
interfere with the ordinary conduct of the businesses of the Company and
its Restricted Subsidiaries;

     (i)  Liens on assets of Persons which become Restricted Subsidiaries
after the date of this Agreement, provided, however, that such Liens
existed at the time the respective Persons became Subsidiaries and were not
created in anticipation thereof;

     (j)  Security interests on any property acquired or held by the
Company or its Restricted Subsidiaries in the ordinary course of business,
other than the Collateral, securing Indebtedness in an aggregate
outstanding principal amount which cannot exceed at any time $25,000,000;

     (k)  Liens securing Capital Lease Obligations on assets subject to
such Capital Leases, provided that such Capital Leases are permitted under
subsection 7.11;

     (l)  Liens arising solely by virtue of any statutory or common law
provision relating to banker's liens, rights of set-off or similar rights
and remedies as to deposit accounts or other funds maintained with a
creditor depository institution; provided that (i) such deposit account is
not a dedicated cash collateral account and is not subject to restrictions
against access by the Company in excess of those set forth by regulations
promulgated by the Federal Reserve Board, and (ii) such deposit account is
not intended by the Company or any of its Restricted Subsidiaries to
provide collateral to the depository institution.  The provisions of this
subsection shall not apply to cash collateral accounts maintained by SPC
with any third Person; 

     (m)  Liens securing Indebtedness permitted under Section 7.05(d); 

     (n)  Liens upon the Collateral described in the Company Security
Agreement to secure Indebtedness permitted by subsection 7.05(j); and

     (o)  Liens upon the assets of SPC permitted pursuant to the Indenture
referenced in the definition of "Timber Notes."

          7.02 Disposition of Assets.

          The Company shall not, and shall not suffer or permit any of its
Restricted Subsidiaries to, directly or indirectly, sell, assign, lease,
convey, transfer or otherwise dispose of (whether in one or a series of
transactions) any property (including accounts and notes receivable, with
or without recourse) or enter into any agreement to do any of the
foregoing, except:

     (a)  Dispositions of inventory, or used, worn-out or surplus
equipment, all in the ordinary course of business; 

     (b)  The sale of equipment to the extent that such equipment is
exchanged for credit against the purchase price of similar replacement
equipment, or the proceeds of such sale are reasonably promptly applied to
the purchase price of such replacement equipment; 

     (c)  Dispositions of all or part of Salmon Creek Corporation or Salmon
Creek Property; 

     (d)  Trading in short-term investment securities in the ordinary
course of business;

     (e)  Dispositions of assets by any Restricted Subsidiary to the
Company or any Wholly-Owned Restricted Subsidiary or by the Company to any
Wholly-Owned Restricted Subsidiary;

     (f)  Dispositions of assets by the Company in payment of a dividend or
distribution permitted by Section 7.12; 

     (g)  Any Permitted Salmon Creek Transaction; and

     (h)  Other dispositions of assets with an aggregate book value, on a
cumulative basis, not to exceed $25,000,000 during the term of this
Agreement and which assets are not subject to any Collateral Document.

          7.03 Consolidations and Mergers.

          The Company shall not, and shall not suffer or permit any of its
Restricted Subsidiaries to, merge, consolidate with or into, or convey,
transfer, lease or otherwise dispose of (whether in one transaction or in a
series of transactions) all or substantially all of its assets (whether now
owned or hereafter acquired) to or in favor of any Person, except:

     (a)  Any Restricted Subsidiary of the Company may merge with or into
the Company or any one or more Restricted Subsidiaries of the Company,
provided that (i) if any transaction shall be between a Restricted
Subsidiary and a Wholly-Owned Restricted Subsidiary, the Wholly-Owned
Subsidiary shall be the continuing or surviving corporation, and (ii) if
any transaction shall be between a Restricted Subsidiary and the Company,
the Company shall be the continuing or surviving corporation; and

     (b)  Any Restricted Subsidiary of the Company may sell or otherwise
dispose of all or substantially all of its assets (upon voluntary
liquidation or otherwise), to the Company or another Wholly-Owned
Restricted Subsidiary of the Company.

          7.04 Loans and Investments.

          The Company shall not purchase or acquire, or suffer or permit
any Restricted Subsidiary to purchase or acquire, or make any commitment
therefor, any capital stock, equity interest, or any obligations or other
securities of, or any interest in, any Person, or make or commit to make
any Acquisitions, or make or commit to make any advance, loan, extension of
credit or capital contribution to or any other investment in, any Person
including any Affiliate of the Company (together, "Investments"), except
for:  

     (a)  Investments in Cash Equivalents;

     (b)  Extensions of credit in the nature of accounts receivable or
notes receivable arising from the sale or lease of goods or services in the
ordinary course of business;

     (c)  Investments by the Company or any Restricted Subsidiary in the
Company, any Wholly-Owned Restricted Subsidiary, or any other Person that,
after giving effect to such Investment, becomes a Wholly-Owned Restricted
Subsidiary;

     (d)  Investments made pursuant to the Bear Stearns Investment Advisory
Contract or pursuant to successor cash management arrangements consistent
with the investment policy adopted by the Board of Directors of the Company
and reasonably satisfactory to the Bank; 

     (e)  Extensions of credit in the ordinary course of business to its
employees and independent contractors which in the aggregate outstanding
amount do not exceed $1,000,000 at any time; 

     (f)  Any Permitted Salmon Creek Transaction; and

     (g)  Other Investments that do not exceed $1,000,000 in the aggregate
at any time outstanding (without giving effect to any write-downs thereof).

          7.05 Limitation on Indebtedness.

          The Company shall not, and shall not suffer or permit any of its
Restricted Subsidiaries to, create, incur, assume, suffer to exist, or
otherwise become or remain directly or indirectly liable with respect to,
any Indebtedness, except:

     (a)  Indebtedness incurred pursuant to this Agreement;

     (b)  Accounts payable to trade creditors for goods and services and
current operating liabilities (not the result of the borrowing of money)
incurred in the ordinary course of business of the Company or such
Restricted Subsidiary in accordance with customary terms and paid within
the specified time, unless contested in good faith by appropriate
proceedings and reserved for in accordance with GAAP;

     (c)  Indebtedness consisting of Contingent Obligations permitted
pursuant to Section 7.08; 

     (d)  Up to an aggregate outstanding principal amount of $10,000,000 in
tax-free financing, which amount shall be an aggregate limit for the period
covered by this Agreement;

     (e)  Indebtedness existing on the Closing Date and set forth in
Schedule 7.05, which Indebtedness may be refinanced on terms and conditions
no less favorable than those existing on the Closing Date;

     (f)  Indebtedness secured by Liens permitted by Section 7.01(i), (j)
and (k);

     (g)  Indebtedness incurred in connection with leases permitted
pursuant to Section 7.11;

     (h)  Extensions of credit permitted under Sections 7.04(c) and
7.04(e);

     (i)  Indebtedness incurred in connection with investments permitted
under Subsection 7.04(d); 

     (j)  Additional Indebtedness in an aggregate principal amount at any
time outstanding not to exceed $45,000,000 incurred on or after the
Revolving Termination Date if the Acquisition Cost of Timberlands subject
to the Deeds of Trust (or, if the Company has provided an appraisal of such
Timberlands satisfactory to the Bank, the appraised fair market value of
such Timberlands) is equal to or greater than 250% of the Effective Amount
of Term Loans; and

     (k)  Other Indebtedness in aggregate principal amount at any time
outstanding not to exceed $5,000,000.

          7.06 Transactions with Affiliates.

     (a)  The Company shall not, and shall not suffer or permit any of its
Restricted Subsidiaries to, enter into any transaction with any Affiliate
of the Company or of any such Restricted Subsidiary, except (i) as
expressly permitted by this Agreement, or (ii) in its ordinary course of
business and pursuant to the reasonable requirements of the business of the
Company or such Restricted Subsidiary; in each case (i) and (ii), upon fair
and reasonable terms no less favorable to the Company or such Restricted
Subsidiary than would obtain in a comparable arm's-length transaction with
a Person not an Affiliate of the Company or such Restricted Subsidiary.

     (b)  The provisions contained in this Section shall not apply to: (i)
any transaction permitted by Section 7.12, (ii) the execution and delivery
of, the performance of, and the making of any payments required by, the Tax
Sharing Agreement, (iii) the execution and delivery of, the performance of,
and the making of any payments required by, the Britt Lumber Agreement,
(iv) any Permitted Salmon Creek Transaction, (v) the making of payments to
MAXXAM Group Inc., MAXXAM Inc. and their Affiliates for reimbursement for
actual services provided thereby to the Company and its Restricted
Subsidiaries based on actual costs and an allocable share of overhead
expenses consistent with prior practices, (vi) compensation,
indemnification and other benefits paid or made available to officers,
directors, managers and employees of the Company or a Restricted Subsidiary
for services rendered in such person's capacity as an officer, director,
manager, or employee (including reimbursement or advancement of reasonable
out-of-pocket expenses and directors' and officers' liability insurance),
or (vii) any transaction between the Company and any Wholly-Owned
Restricted Subsidiary or between Wholly-Owned Restricted Subsidiaries.

     (c)  The Company shall not amend or modify the Britt Lumber Agreement
without the prior written consent of the Bank if such amendment would
materially alter the obligations or rights of the Company thereunder. 

          7.07 Use of Proceeds.

          The Company shall not and shall not suffer or permit any of its
Subsidiaries to use any portion of the proceeds of any extension of credit
under this Agreement, directly or indirectly, (i) to purchase or carry
Margin Stock, (ii) to repay or otherwise refinance indebtedness of the
Company or others incurred to purchase or carry Margin Stock, (iii) to
extend credit for the purpose of purchasing or carrying any Margin Stock,
(iv) to acquire any security in any transaction that is subject to Section
13 or 14 of the Exchange Act, or (v) to make any investments under the Bear
Stearns Investment Advisory Contract.

          7.08 Contingent Obligations.

          The Company shall not, and shall not suffer or permit any of its
Restricted Subsidiaries to, create, incur, assume or suffer to exist any
Contingent Obligations except:

     (a)  Endorsements for collection or deposit in the ordinary course of
business;

     (b)  Contingent Obligations of the Company and its Restricted
Subsidiaries existing as of the Closing Date and listed in Schedule 7.08;

     (c)  Contingent Obligations entered into in the ordinary course of
business;

     (d)  Contingent Obligations relating to Standby Letters of Credit; 

     (e)  Permitted Swap Obligations; 

     (f)  Guaranty Obligations of the Company with respect to obligations
of Wholly-Owned Restricted Subsidiaries that are not prohibited hereby; and

     (g)  Other Contingent Obligations in aggregate amount not to exceed
$5,000,000 at any time outstanding.

          7.09 Joint Ventures.

          The Company shall not, and shall not suffer or permit any of its
Restricted Subsidiaries to enter into any Joint Venture with any Person
other than the Company or a Wholly-Owned Restricted Subsidiary, other than
in the ordinary course of business.

          7.10 ERISA.

          The Company shall not, and to the fullest extent permitted by
applicable law shall not suffer or permit any of its ERISA Affiliates to: 
(a) engage in a prohibited transaction or violation of the fiduciary
responsibility rules with respect to any Plan which has resulted or could
reasonably be expected to result in liability of the Company in an
aggregate amount in excess of $5,000,000; or (b) engage in a transaction
that could reasonably be expected to be subject to Section 4069 or 4212(c)
of ERISA and that could reasonably be expected to have a Material Adverse
Effect.

          7.11 Lease Obligations.

          The Company shall not, and shall not suffer or permit any of its
Restricted Subsidiaries to, create or suffer to exist any obligations for
the payment of rent for any property under lease or agreement to lease,
except for:

     (a)  Leases of the Company and its Restricted Subsidiaries in
existence on the Closing Date and any renewal, extension or refinancing
thereof;

     (b)  Capital Leases other than those permitted under subsection (a) of
this Section, entered into by the Company or any of its Restricted
Subsidiaries after the Closing Date to finance the acquisition of
equipment; provided that the aggregate annual rental payments for all such
Capital Leases shall not exceed $10,000,000 in the aggregate; and

     (c)  Operating leases entered into by the Company and its Restricted
Subsidiaries in the ordinary course of business.

          7.12 Restricted Payments.

          The Company shall not, and shall not permit any of its Restricted
Subsidiaries to, declare or make any dividend payment or other distribution
of assets, properties, cash, rights, obligations or securities on account
of any shares of any class of its capital stock or other equity interest,
or purchase, redeem or otherwise acquire for value any shares of its
capital stock or other equity interest or any warrants, rights or options
to acquire such shares or interests, now or hereafter outstanding (any of
the foregoing, a "Restricted Payment"), except:

     (a)  The Company or any Restricted Subsidiary may declare and make
Restricted Payments payable solely in its common stock or other equity
interest;

     (b)  The Company or any Restricted Subsidiary may purchase, redeem or
otherwise acquire shares of its common stock or warrants or options to
acquire any such shares with the proceeds received from the substantially
concurrent issue of new shares of its common stock; 

     (c)  Any Restricted Subsidiary may declare and make Restricted
Payments to the Company or any other Wholly-Owned Restricted Subsidiary;  

     (d)  The Company may declare and make Restricted Payments for any
fiscal quarter, as long as (x) no Default or Event of Default exists at the
time of such Restricted Payment, (y) the financial statements with respect
to such fiscal quarter have been delivered to the Bank in compliance with
Section 6.01(c), and (z) the aggregate Restricted Payments for that fiscal
quarter and the three preceding fiscal quarters, excluding from such
aggregation all Restricted Payments permitted by subsections 7.12(b) or
(e), does not exceed the following "maximum amount":  

          (1)   if the Restricted Payment is to be made on or before
December 31, 1999, or if Term Loans are not outstanding when such
Restricted Payment is made, the "maximum amount" shall be Excess Cash Flow
for the four most recent fiscal quarters for which financial statements
have been delivered pursuant to Section 6.01(c) hereof or 6.01(b) of the
Prior Credit Agreement; and 

          (2)  if the Restricted Payment is to be made after December 31,
1999, and if any Terms Loans are outstanding when such Restricted Payment
is made, the "maximum amount" shall be (A) Excess Cash Flow for such four
fiscal quarters, minus (B) an amount, not to exceed 50% of such Excess Cash
Flow for such four fiscal quarters, equal to (i) if such four fiscal
quarters conclude with the first fiscal quarter of any year, 25% of the
Effective Amount of Term Loans that, as of December 31 of that year, will
have been outstanding for one year or more; (ii) if such four fiscal
quarters conclude with the second fiscal quarter of any year, 50% of the
Effective Amount of Term Loans that, as of December 31 of that year, will
have been outstanding for one year or more; (iii) if such four fiscal
quarters conclude with the third fiscal quarter of any year, 75% of the
Effective Amount of Term Loans that, as of December 31 of that year, will
have been outstanding for one year or more; and (iv) if such four fiscal
quarters conclude with the fourth fiscal quarter of any year, 100% of the
Effective Amount of Term Loans that, as of the end of that fourth fiscal
quarter, had been outstanding for one year or more; and

     (e)  Any Restricted Subsidiary of the Company can make Restricted
Payments to the extent funded with Salmon Creek Proceeds to the Company or
to any other Subsidiary of the Company and the Company can make Restricted
Payments to the extent funded with Salmon Creek Proceeds.

          7.13 Change in Business.

          The Company shall not, and shall not permit any of its
Subsidiaries to, engage in any material line of business substantially
different from those lines of business carried on by it on the date hereof.
     
          7.14 Accounting Changes.

          The Company shall not, and shall not suffer or permit any of its
Restricted Subsidiaries to, make any significant change in accounting
treatment or reporting practices, except as required by GAAP or the SEC or
change the fiscal year of the Company or of any of its consolidated
Restricted Subsidiaries; provided, however, that the Company or any of its
consolidated Restricted Subsidiaries may change any of its significant
accounting methods or reporting practices provided that the alternative
accounting method chosen conforms with GAAP and the Company or any of its
consolidated Restricted Subsidiaries has obtained a "preferability letter"
from its independent public accountants stating that each such significant
change in accounting method is preferable in the circumstances.

          7.15 Other Contracts.

          The Company shall not enter into any employment contracts or
other employment or service-retention arrangements whose terms, including
salaries, benefits and other compensation, are not normal and customary in
the industry.

                                ARTICLE VIII

                             EVENTS OF DEFAULT

          8.01 Event of Default.

          Any of the following shall constitute an "Event of Default":

     (a)  Non-Payment.  The Company fails to make, (i) when and as required
to be made herein, payments of any amount of principal of any Loan, or (ii)
when and as required to be paid under any Specified Swap Contract, any
payment or transfer under such Specified Swap Contract, or (iii) within
five days after the same becomes due, payment of any interest, fee or any
other amount payable hereunder or under any other Loan Document (other than
a Specified Swap Contract); or

     (b)  Representation or Warranty.  Any representation or warranty by
the Company or any Subsidiary of the Company made or deemed made herein, in
any other Loan Document other than a Specified Swap Contract, or which is
contained in any certificate, document or financial or other statement by
the Company, any Subsidiary of the Company, or any Responsible Officer of
the Company, SPC, or MGHI, furnished at any time under this Agreement, or
in or under any other Loan Document other than a Specified Swap Contract,
is incorrect in any material respect on or as of the date made or deemed
made; or

     (c)  Other Defaults.  The Company fails to perform or observe any
other term or covenant contained in this Agreement or any Loan Document, or
any default or event of default shall occur thereunder and such default
shall continue unremedied for a period of 30 days (the "30-Day Period")
after the earlier of (i) the date upon which a Responsible Officer of the
Company knew or should have known of such failure or (ii) the date upon
which written notice thereof is given to the Company by the Bank, unless
(in both (i) and (ii)) the default is curable, the Company has started to
cure such default and continues to try to cure such default, and the
default is cured within the 60 days starting on the first day of the 30-Day
Period; 

     (d)  Cross-Default.  (i) The Company or any of its Restricted
Subsidiaries (A) fails to make any payment in respect of any Indebtedness
or Contingent Obligation (other than in respect of Swap Contracts), having
an aggregate principal amount (including undrawn committed or available
amounts and including amounts owing to all creditors under any combined or
syndicated credit arrangement) of more than $5,000,000 when due (whether by
scheduled maturity, required prepayment, acceleration, demand, or
otherwise) and such failure continues after the applicable grace or notice
period, if any, specified in the relevant document on the date of such
failure; or (B) fails to perform or observe any other condition or
covenant, or any other event shall occur or condition exist, under any
agreement or instrument relating to any such Indebtedness or Contingent
Obligation, and such failure continues after the applicable grace or notice
period, if any, specified in the relevant document on the date of such
failure if the effect of such failure, event or condition is to cause, or
to permit the holder or holders of such Indebtedness or beneficiary or
beneficiaries of such Indebtedness (or a trustee or agent on behalf of such
holder or holders or beneficiary or beneficiaries) to cause such
Indebtedness to be declared to be due and payable prior to its stated
maturity, or such Contingent Obligation to become payable or cash
collateral in respect thereof to be demanded; or (ii) there occurs under
any Specified Swap Contract an Early Termination Date resulting from (1)
any event of default under such Specified Swap Contract as to which the
Company is the Defaulting Party (as defined in such Specified Swap
Contract) or (2) any Termination Event (as defined in such Specified Swap
Contract) as to which the Company is an Affected Party (as defined in such
Specified Swap Contract), and, in either event, the Swap Termination Value
owed by the Company as a result thereof is greater than $5,000,000; or
(iii) an "Event of Default" exists as defined in the Indenture referenced
in the definition of Timber Notes herein; or

     (e)  Insolvency; Voluntary Proceedings.  The Company, SPC, or any of
the Company's Restricted Subsidiaries (i) ceases or fails to be solvent, or
generally fails to pay, or admits in writing its inability to pay, its
debts as they become due, subject to applicable grace periods, if any,
whether at stated maturity or otherwise; (ii) voluntarily ceases to conduct
its business in the ordinary course; (iii) commences any Insolvency
Proceeding with respect to itself; or (iv) takes any action to effectuate
or authorize any of the foregoing; or

     (f)  Involuntary Proceedings.  (i) Any involuntary Insolvency
Proceeding is commenced or filed against the Company or any of its
Restricted Subsidiaries or SPC, or any writ, judgment, warrant of
attachment, execution or similar process, is issued or levied against a
substantial part of the Company's or SPC's properties, and any such
proceeding or petition shall not be dismissed, or such writ, judgment,
warrant of attachment, execution or similar process shall not be released,
vacated or fully bonded within 60 days after commencement, filing or levy;
(ii) the Company or SPC admits the material allegations of a petition
against it in any Insolvency Proceeding, or an order for relief (or similar
order under non-U.S. law) is ordered in any Insolvency Proceeding; or (iii)
the Company or SPC acquiesces in the appointment of a receiver, trustee,
custodian, conservator, liquidator, mortgagee in possession (or agent
therefor), or other similar Person for itself or a substantial portion of
its property or business; or

     (g)  ERISA.  (i) An ERISA Event shall occur with respect to a Pension
Plan or Multiemployer Plan which has resulted or could reasonably be
expected to result in liability of the Company under Title IV of ERISA to
the Pension Plan, Multiemployer Plan or the PBGC in an aggregate amount in
excess of $5,000,000; or (ii) the aggregate amount of Unfunded Pension
Liability among all Pension Plans at any time exceeds $5,000,000; or (iii)
the Company or any ERISA Affiliate shall fail to pay when due, after the
expiration of any applicable grace period, any installment payment with
respect to its withdrawal liability under Section 4201 of ERISA under a
Multiemployer Plan in an aggregate amount in excess of $5,000,000; or

     (h)  Monetary Judgments.  One or more final (non-interlocutory)
judgments, orders, decrees or arbitration awards is entered against the
Company or any of its Restricted Subsidiaries involving in the aggregate a
liability (to the extent not covered by independent third-party insurance
as to which the insurer does not dispute coverage) as to any single or
related series of transactions, incidents or conditions, that would
reasonably be expected to have a Material Adverse Effect, and the same
shall remain unsatisfied, unvacated and unstayed pending appeal for a
period of 30 days after the entry thereof; or

     (i)  Non-Monetary Judgments.  Any non-monetary judgment, order or
decree is entered against the Company or any of its Restricted Subsidiaries
which does or would reasonably be expected to have a Material Adverse
Effect, and there shall be any period of 30 consecutive days during which a
stay of enforcement of such judgment or order, by reason of a pending
appeal or otherwise, shall not be in effect; or

     (j)  Change in Control.  There occurs any Change in Control; or 

     (k)  Collateral.

          (1)  (A)  Any material provision of any Collateral Document shall
for any reason other than pursuant to the terms thereof cease to be valid
and binding on or enforceable against the Company thereto; or

               (B)  Any Collateral Document shall for any reason (other
than pursuant to the terms thereof) cease to create a valid security
interest or Lien in the Collateral purported to be covered thereby; or

               (C)  The Bank ceases to have, for any reason, a perfected
and first priority security interest or Lien on any item of Collateral
(subject only to Permitted Liens) and the failure to have such perfected
first priority security interest or Lien is not caused by the Bank's
failure to timely file a UCC continuation statement;

and the Effective Amount of Loans and L/C Obligations is more than the
amount computed pursuant to clause (a) of the definition of the Borrowing
Base (excluding, in the computation of the Borrowing Base for purposes of
this clause the Collateral encumbered by the Collateral Documents covered
by clauses (A), (B), and (C) of this subsection 8.01(k)(1)); or

          (2)  The Company shall state in writing its belief that any
material provision of any Collateral Document is not valid and binding or
the Company shall bring an action to limit its obligations or liabilities
thereunder; or

          (3)  Any title insurance coverage in respect of any material
portion of the Timberlands covered by a Collateral Document is disavowed or
becomes ineffective and the Company fails to furnish the Bank with
replacement coverages in amount, form and substance substantially similar
to such title insurance coverage from title insurance companies reasonably
satisfactory to the Bank; or

          (4)  The Bank, in good faith, considers any Collateral to be
unsafe or in danger of misuse to the extent that the Bank's prospect of or
right to payment or performance under this Agreement or any Loan Document
is materially impaired; or

     (l)  Condemnation.  All, or such as in the reasonable opinion of the
Bank constitutes a substantial portion, of the Timberlands or other
property of the Company is condemned, seized, or expropriated; or

     (m)  Regulatory Action.  Any Governmental Authority takes or
institutes action which could reasonably be expected to have, on an
Unconsolidated Basis, a Material Adverse Effect on the Company's financial
condition or results of operations or ability to perform its obligations
under this Agreement or any other Loan Document.

          8.02 Remedies.

          If any Event of Default exists, the Bank may:

     (a)  Declare its commitment to make Loans and/or Issue Letters of
Credit to be terminated, whereupon such commitment shall be terminated;

     (b)  Declare the unpaid principal amount of all outstanding Loans, all
Outstanding Letters of Credit (including the Company's reimbursement
obligations for Outstanding Letters of Credit), all L/C Obligations, all
interest accrued and unpaid thereon, and all other amounts owing or payable
hereunder or under any other Loan Document to be immediately due and
payable, without presentment, demand, protest or other notice of any kind,
all of which are hereby expressly waived by the Company; and

     (c)  Exercise on behalf of itself all rights and remedies available to
it under the Loan Documents or applicable law;

provided, however, that upon the occurrence of any event specified in
subsection (e) or (f) of Section 8.01 (in the case of clause (i) of
subsection (f) upon the expiration of the 60-day period mentioned therein),
the obligation of the Bank to make Loans and Issue Letters of Credit shall
automatically terminate and the unpaid principal amount of all outstanding
Loans, all Outstanding Letters of Credit (including the Company's
reimbursement obligations for Outstanding Letters of Credit), all L/C
Obligations, and all interest and other amounts as aforesaid shall
automatically become due and payable without further act of the Bank.

Amounts paid by the Company to be applied to prepayment of  L/C Obligations
and to the Company's reimbursement obligations for Outstanding Letters of
Credit may be held by the Bank as cash collateral for such Obligations.

          8.03 Specified Swap Contract Remedies.

          Notwithstanding any other provision of this Article, each Swap
Provider shall have the right, with prior notice to the Bank, with respect
to any Specified Swap Contract of such Swap Provider, (a) to declare an
event of default, termination event or other similar event thereunder and
to create an Early Termination Date, (b) to determine net termination
amounts in accordance with the terms of such Specified Swap Contracts and
to set-off amounts in accordance with the terms of such Specified Swap
Contracts, and (c) to prosecute any legal action against the Company to
enforce net amounts owing to such Swap Provider.  The Company hereby grants
the Bank a security interest in all of the Company's rights, title, and
interests in the Company's rights to payment and performance by the Swap
Provider in each of the Specified Swap Contracts.

          8.04 Rights Not Exclusive.

          The rights provided for in this Agreement and the other Loan
Documents are cumulative and are not exclusive of any other rights, powers,
privileges or remedies provided by law or in equity, or under any other
instrument, document or agreement now existing or hereafter arising.

          8.05 Certain Financial Covenant Defaults.

          In the event that, after taking into account any extraordinary
charge to earnings taken or to be taken as of the end of any fiscal period
of the Company (a "Charge"), and if solely by virtue of such Charge, there
would exist an Event of Default due to the breach of Section 7.13 as of
such fiscal period end date, such Event of Default shall be deemed to arise
upon the earlier of (a) the date after such fiscal period end date on which
the Company announces publicly it will take, is taking or has taken such
Charge (including an announcement in the form of a statement in a report
filed with the SEC) or, if such announcement is made prior to such fiscal
period end date, the date that is such fiscal period end date, and (b) the
date the Company delivers to the Bank its audited annual or unaudited
quarterly financial statements in respect of such fiscal period reflecting
such Charge as taken.

                                 ARTICLE IX

                               MISCELLANEOUS

          9.01 Amendments and Waivers.

          No amendment or waiver of any provision of this Agreement or any
other Loan Document, and no consent with respect to any departure by the
Company therefrom, shall be effective unless the same shall be in writing
and signed by the Bank and the Company, and then any such waiver or consent
shall be effective only in the specific instance and for the specific
purpose for which given.

          9.02 Notices.

     (a)  All notices, requests, consents, approvals, waivers and other
communications shall be in writing (including, unless the context expressly
otherwise provides, by facsimile transmission, provided that any matter
transmitted by the Company or the Bank by facsimile (i) shall be
immediately confirmed by a telephone call to the Bank or the Company,
respectively, at the number specified on the signature pages to this
Agreement and (ii) shall be followed promptly by delivery of a hard copy
original thereof) and mailed, faxed or delivered, to the address or
facsimile number specified for notices on the signature pages of this
Agreement; or, as directed to the Company or the Bank, to such other
address as shall be designated by such party in a written notice to the
other party, and as directed to any other party, at such other address as
shall be designated by such party in a written notice to the other party.

     (b)  All such notices, requests, consents, approvals, and
communications shall, when transmitted by overnight delivery, or faxed, be
effective when delivered for overnight (next-day) delivery, or transmitted
in legible form by facsimile machine, respectively, or if mailed, upon the
third Business Day after the date deposited into the U.S. mail, or if
delivered, upon delivery; except that notices of borrowing, of
conversion/continuation, prepayment, and termination or reduction of
commitments pursuant to Article II shall not be effective until actually
received by the Bank.

     (c)  Any agreement of the Bank herein to receive certain notices by
telephone or facsimile is solely for the convenience and at the request of
the Company.  The Bank shall be entitled to rely on the authority of any
Person purporting to be a Person authorized by the Company to give such
notice and the Bank shall not have any liability to the Company or other
Person on account of any action taken or not taken by the Bank in reliance
upon such telephonic or facsimile notice.  The obligation of the Company to
repay the Loans, the L/C Obligations, and the other Obligations shall not
be affected in any way or to any extent by any failure by the Bank to
receive written confirmation of any telephonic or facsimile notice or the
receipt by the Bank of a confirmation which is at variance with the terms
understood by the Bank to be contained in the telephonic or facsimile
notice.

          9.03 No Waiver; Cumulative Remedies.

          No failure to exercise and no delay in exercising, on the part of
the Bank, any right, remedy, power or privilege hereunder, shall operate as
a waiver thereof;  nor shall any single or partial exercise of any right,
remedy, power or privilege hereunder preclude any other or further exercise
thereof or the exercise of any other right, remedy, power or privilege.

          9.04 Costs and Expenses.

          The Company shall:

     (a)  Whether or not the transactions contemplated hereby are
consummated, pay or reimburse the Bank within 20 Business Days after demand
(subject to subsection 4.01(d)) for all costs and expenses incurred by the
Bank in connection with the development, preparation, delivery,
administration and execution of, and any amendment, supplement, waiver or
modification to (in each case, whether or not consummated), this Agreement,
any Loan Document, and any other documents prepared in connection herewith
or therewith, and the consummation of the transactions contemplated hereby
and thereby, including filing or recording taxes or fees in connection with
any Collateral Documents, title insurance premiums, documentary stamp or
intangible taxes, recording fees and mortgage taxes payable in connection
with the recording of any Deed of Trust or the issuance of title insurance
policies, and reasonable Attorney Costs incurred by the Bank with respect
thereto; and

     (b)  Pay or reimburse the Bank within 20 Business Days after demand
(subject to subsection 4.01(d)) for all costs and expenses (including
Attorney Costs) incurred by them in connection with the enforcement,
attempted enforcement, or preservation of any rights or remedies under this
Agreement or any other Loan Document during the existence of an Event of
Default or after acceleration of the Loans (including in connection with
any "workout" or restructuring regarding the Loans, and including in any
Insolvency Proceeding or appellate proceeding); and

     (c)  Pay or reimburse the Bank within 20 Business Days after demand
(subject to subsection 4.01(d)) for all reasonable appraisal (including the
allocated cost of internal appraisal services), audit, environmental
inspection and review (including the allocated cost of such internal
services), search and filing costs, fees and expenses, incurred or
sustained by the Bank in connection with the matters referred to under
subsections (a) and (b) of this Section.

          9.05 Company Indemnification.

     (a)  Whether or not the transactions contemplated hereby are
consummated, the Company shall indemnify, defend and hold the Bank, each
Affiliate of the Bank, and each of its respective officers, directors,
employees, counsel, agents and attorneys-in-fact (each, an "Indemnified
Person") harmless from and against any and all liabilities, obligations,
losses, damages, penalties, actions, judgments, suits, costs, charges,
expenses and disbursements (including Attorney Costs) of any kind or nature
whatsoever which may at any time (including at any time following repayment
of the Loans and L/C Obligations, expiration of the Standby Letters of
Credit, and termination of all Specified Swap Contracts) be imposed on,
incurred by or asserted against any such Person in any way relating to or
arising out of this Agreement or any document contemplated by or referred
to herein, or the transactions contemplated hereby, or any action taken or
omitted by any such Person under or in connection with any of the
foregoing, including with respect to any investigation, litigation or
proceeding (including any Insolvency Proceeding or appellate proceeding)
related to or arising out of this Agreement, the Specified Swap Contracts,
or the Standby Letters of Credit, the Loans or the use of the proceeds
thereof, whether or not any Indemnified Person is a party thereto (all the
foregoing, collectively, the "Indemnified Liabilities"); provided, that the
Company shall have no obligation hereunder to any Indemnified Person with
respect to Indemnified Liabilities resulting solely from the gross
negligence or willful misconduct of such Indemnified Person. The agreements
in this Section shall survive payment of all other Obligations.

     (b)  (1)  The Company shall indemnify, defend and hold harmless each
Indemnified Person, from and against any and all liabilities, obligations,
losses, damages, penalties, actions, judgments, suits, costs, charges,
expenses or disbursements (including Attorney Costs and the allocated cost
of internal environmental audit or review services), which may be incurred
by or asserted against such Indemnified Person in connection with or
arising out of any pending or threatened investigation, litigation or
proceeding, or any action taken by any Person, with respect to any
Environmental Claim arising out of or related to any property subject to a
Deed of Trust in favor of the Bank except to the extent that such
Environmental Claim arises by reason of the Bank's actions taken after the
Bank acquires title to any such property following a foreclosure sale or
deed-in-lieu transaction and such actions on the part of the Bank do not
relate or pertain in any way to any conditions or circumstances that were
either (i) caused or exacerbated (whether directly or indirectly) in any
way by the Company, or (ii) existed (regardless of whether they were known
or unknown) at the time the Bank acquired title to such property.  No
reasonable action taken (reasonableness of an action to be determined as of
the time and under the circumstances such action is taken) by legal counsel
chosen by the Bank in defending against any such investigation, litigation
or proceeding or requested remedial, removal or response action shall
vitiate or any way impair the Company's obligation and duty hereunder to
indemnify and hold harmless the Bank.

          (2)  In no event shall any site visit, observation, or testing by
the Bank (or any contractee of the Bank) be deemed a representation or
warranty that Hazardous Materials are or are not present in, on, or under,
the site, or that there has been or shall be compliance with any
Environmental Law.  Neither the Company nor any other Person is entitled to
rely on any site visit, observation, or testing by the Bank.  The Bank owes
no duty of care to protect the Company or any other Person against, or to
inform the Company or any other party of, any Hazardous Materials or any
other adverse condition affecting any site or property.  The Bank shall not
be obligated to disclose to the Company or any other Person any report or
findings made as a result of, or in connection with, any site visit,
observation, or testing by the Bank.

     (c)  The obligations in this Section shall survive payment of all
other Obligations.  Promptly after receipt by an Indemnified Person of
notice of the commencement of any proceeding indemnified against hereunder,
such Indemnified Person will, if a claim in respect thereof is to be made
against the Company hereunder, notify the Company in writing of the
commencement thereof; but the failure so to notify the Company (i) will not
relieve it from liability under subsections (a) and (b) above unless and to
the extent it did not otherwise learn of such action and such failure
results in the forfeiture by the Company of substantial rights and defenses
and (ii) will not, in any event, relieve the Company from any obligations
to any Indemnified Person other than the indemnification obligation
provided above.  The Company shall be entitled to appoint counsel of the
Company's choice at the Company's expense to represent the Indemnified
Person in any action for which indemnification is sought (in which case the
Company shall not thereafter be responsible for the fees and expenses of
any separate counsel retained by the Indemnified Person except as set forth
below); provided, however, that such counsel shall be reasonably
satisfactory to the Indemnified Person.  Notwithstanding the Company's
election to appoint counsel to represent the Indemnified Person in an
action, the Indemnified Person shall have the right to employ separate
counsel (including local counsel), and the Company shall bear the
reasonable fees, costs and expenses of such separate counsel if (i) the use
of counsel chosen by the Company to represent the Indemnified Person would
present such counsel with a conflict of interest, (ii) the actual or
potential defendants in, or targets of, any such proceeding include both
the Indemnified Person and the Company and the Indemnified Person shall
have reasonably concluded that there may be legal defenses available to the
Indemnified Person which are different from or additional to those
available to the Company, (iii) the Company shall not have employed counsel
reasonably satisfactory to the Indemnified Person to represent the
Indemnified Person within a reasonable time after notice of the institution
of such action, or (iv) the Company shall authorize the Indemnified Person
to employ separate counsel at the expense of the Company.  The Company will
not, without the prior written consent of the Indemnified Person (which
consent shall not be unreasonably withheld), settle or compromise or
consent to the entry of any judgment with respect to any proceeding in
respect of which indemnification may be sought hereunder (whether or not
the Indemnified Person is an actual or potential party to such claim or
action) unless such settlement, compromise or consent includes an
unconditional release of each Indemnified Person from all liability arising
out of such proceeding.

     (d)  All amounts owing under this Section shall be paid within 30 days
after demand.

          9.06 Marshalling; Payments Set Aside.

          The Bank shall be under no obligation to marshall any assets in
favor of the Company or any other Person or against or in payment of any or
all of the Obligations.  To the extent that the Company makes a payment to
the Bank, or the Bank exercises its right of set-off, and such payment or
the proceeds of such set-off or any part thereof are subsequently
invalidated, declared to be fraudulent or preferential, set aside or
required (including pursuant to any settlement entered into by the Bank in
its discretion) to be repaid to a trustee, receiver or any other party, in
connection with any Insolvency Proceeding or otherwise, then to the extent
of such recovery the obligation or part thereof originally intended to be
satisfied shall be revived and continued in full force and effect as if
such payment had not been made or such set-off had not occurred.

          9.07 Successors and Assigns.

          The provisions of this Agreement shall be binding upon and inure
to the benefit of the parties hereto and their respective successors and
assigns, except that the Company may not assign or transfer any of its
rights or obligations under this Agreement without the prior written
consent of the Bank.

          9.08 Assignments, Participations, etc.

     (a)  The Bank may at any time, with the written consent of the Company
at all times other than during the existence of an Event of Default, which
consent shall not be unreasonably withheld, at any time assign and delegate
to one or more Persons (provided that no written consent of the Company
shall be required in connection with any assignment and delegation to an
Affiliate of the Bank and the costs charged to the Company shall not exceed
the costs that would have been charged had the Bank not made such
assignment and delegation) (each an "Assignee") all, or any ratable part of
all, of the Loans, the Company's reimbursement obligations for Outstanding
Letters of Credit, the L/C Obligations, the Bank's commitment to extend
credit hereunder, and the other rights and obligations of the Bank
hereunder; provided, however, that the Company may continue to deal solely
and directly with the Bank in connection with the interest so assigned to
an Assignee until written notice of such assignment, together with payment
instructions, addresses and related information with respect to the
Assignee, shall have been given to the Company by the Bank and the
Assignee.

     (b)  The Bank may at any time sell to one or more Persons (a
"Participant") participating interests in any Loans, the Company's
reimbursement obligations for any Outstanding Letters of Credit, any L/C
Obligations, the Bank's commitment to extend credit hereunder, and the
other interests of the Bank hereunder and under the other Loan Documents;
provided, however, that (i) the Bank's obligations under this Agreement
shall remain unchanged, (ii) the Bank shall remain solely responsible for
the performance of such obligations, (iii) the Company shall continue to
deal solely and directly with the Bank in connection with the Bank's rights
and obligations under this Agreement and the other Loan Documents, and (iv)
the Participant shall, together with the Bank, be entitled to the non-
exclusive protection of Sections 3.01, 3.03 and 9.10 as though it were also
the "Bank" hereunder; except that the Company shall not be obliged to pay
the Participant an amount greater than what the Company would have had to
pay the Bank if it had not sold the participating interest to the
Participant.  In the case of any such participation, if amounts outstanding
under this Agreement are due and unpaid, or shall have been declared or
shall have become due and payable upon the occurrence of an Event of
Default, each Participant shall be deemed to have the right of set-off in
respect of its participating interest in amounts owing under this Agreement
to the same extent as if the amount of its participating interest were
owing directly to it as an Assignee under this Agreement.

     (c)  Notwithstanding any other provision contained in this Agreement
or any other Loan Document to the contrary, the Bank may assign all or any
portion of the Loans held by it to any Federal Reserve Bank or the United
States Treasury as collateral security pursuant to Regulation A of the
Board of Governors of the Federal Reserve System and any Operating Circular
issued by such Federal Reserve Bank, provided that any payment in respect
of such assigned Loans made by the Company to or for the account of the
Bank in accordance with the terms of this Agreement shall satisfy the
Company's obligations hereunder in respect to such assigned Loans to the
extent of such payment.  No such assignment shall release the Bank from its
obligations hereunder.

     9.09 Confidentiality.

          The Bank agrees to take and to cause its Affiliates to take
normal and reasonable precautions and exercise due care to maintain the
confidentiality of all information identified as "confidential" or "secret" 
by the Company and provided to it by the Company or any Subsidiary of the
Company, under this Agreement or any other Loan Document, and neither it
nor any of its Affiliates shall use any such information other than in
connection with or in enforcement of this Agreement and the other Loan
Documents or in connection with other business now or hereafter existing or
contemplated with the Company or any Subsidiary of the Company; except to
the extent such information (i) was or becomes generally available to the
public other than as a result of disclosure by the Bank, or (ii) was or
becomes available on a  non-confidential basis from a source other than the
Company, provided that such source is not bound by a confidentiality
agreement with the Company known to the Bank; provided, however, that the
Bank may disclose such information (A) at the request or pursuant to any
requirement of any Governmental Authority to which the Bank is subject or
in connection with an examination of the Bank by any such authority; (B)
pursuant to subpoena or other court process; provided that the Bank shall,
if permitted by applicable law, offer the Company a reasonable opportunity
to obtain a protective order in connection therewith; (C) when required to
do so in accordance with the provisions of any applicable Requirement of
Law; (D) to the extent reasonably required in connection with any
litigation or proceeding to which the Bank or its Affiliates may be party;
provided that the Bank shall, if permitted by applicable law, offer the
Company a reasonable opportunity to obtain a protective order in connection
therewith; (E) to the extent reasonably required in connection with the
exercise of any remedy hereunder or under any other Loan Document; (F) to
the Bank's independent auditors and other professional advisors if such
advisors have a duty of confidentiality toward the Bank; (G) to any
Participant or Assignee, actual or potential, provided that such Person
agrees in writing to keep such information confidential to the same extent
required of the Bank hereunder; (H) as to the Bank or its Affiliate, as
expressly permitted under the terms of any other document or agreement
regarding confidentiality to which the Company or any Subsidiary of the
Company is party or is deemed party with the Bank or such Affiliate; and
(I) to its Affiliates provided that such Affiliates shall be subject to the
same confidentiality obligation as the Bank in instances where there is no
document or agreement regarding confidentiality between the Company or any
Subsidiary or the Company and the Bank or such Affiliate.

          9.10 Set-off.

          In addition to any rights and remedies of the Bank provided by
law, if an Event of Default exists or the Loans have been accelerated, the
Bank is authorized at any time and from time to time, without prior notice
to the Company, any such notice being waived by the Company to the fullest
extent permitted by law, to set off and apply any and all deposits (general
or special, time or demand, provisional or final) at any time held by, and
other indebtedness at any time owing by, the Bank to or for the credit or
the account of the Company against any and all Obligations owing to the
Bank, now or hereafter existing, irrespective of whether or not the Bank
shall have made demand under this Agreement or any Loan Document and
although such Obligations may be contingent or unmatured.

          9.11 Counterparts.

          This Agreement may be executed in any number of separate
counterparts, each of which, when so executed, shall be deemed an original,
and all of said counterparts taken together shall be deemed to constitute
but one and the same instrument. 

          9.12 Severability; Conflicting Provisions.

     (a)  Severability.  The illegality or unenforceability of any
provision of this Agreement or any instrument or agreement required
hereunder shall not in any way affect or impair the legality or
enforceability of the remaining provisions of this Agreement or any
instrument or agreement required hereunder.

     (b)  Conflicting Provisions.  In the event of any conflict between any
provision contained in this Agreement and any provision contained in
another Loan Document, the provision contained in this Agreement shall
prevail.

          9.13 No Third Parties Benefited.

          This Agreement is made and entered into for the sole protection
and legal benefit of the Company, the Bank, and each Affiliate of the Bank
and their permitted successors and assigns, and no other Person shall be a
direct or indirect legal beneficiary of, or have any direct or indirect
cause of action or claim in connection with, this Agreement or any of the
other Loan Documents.

          9.14 Governing Law and Jurisdiction.

     (a)  THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE
WITH, THE LAW OF THE STATE OF CALIFORNIA; PROVIDED THAT THE BANK SHALL
RETAIN ALL RIGHTS ARISING UNDER FEDERAL LAW.

     (b)  Nothing contained in this Section shall override any contrary
provision contained in any Specified Swap Contract.

          9.15 Verification of Receivables.

          The Bank may at any time, either orally or in writing, request
confirmation from any Receivable Debtor of the current amount and status of
the Receivable upon which such Receivable Debtor is obligated.

          9.16 Termination of Commitment to Lend under the Prior Credit
Agreement.

          Upon execution of this Agreement by the Company and the Bank, the
Bank's commitment to Issue Letters of Credit and to lend under the Prior
Credit Agreement shall automatically terminate without necessity of further
act of the Bank and the Company.

     IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be duly executed and delivered by their proper and duly authorized officers
as of the day and year first above written.

THE PACIFIC LUMBER COMPANY


By:       /S/ GARY L. CLARK     
Name:     Gary L. Clark
Title:    Vice President-Finance and
          Administration

Address for Notices:

          The Pacific Lumber Company
          125 Main Street
          Scotia, California  95565

          Attention:  Gary L. Clark
               Vice President-Finance
               and Administration

          Telephone:  707/764-4213
          FAX:  707/764-4269

          With a copy to:

          MAXXAM Inc.
          5847 San Felipe - Suite 2600
          Houston, Texas  77057

          Attention:  Treasury Department

          Telephone:  713/267-3619
          FAX:  713/267-3704

BANK OF AMERICA NATIONAL TRUST
     AND SAVINGS ASSOCIATION


By:      /S/ MICHAEL J. BALOK
Name:     Michael J. Balok
Title:    Managing Director

Address for notices:

          Paper and Forest Products #9973
          Bank of America National Trust and Savings Association
          555 California Street - 41st Floor
          P.O. Box 37000
          San Francisco, CA  94137

          Attention:  Michael J. Balok

          Telephone:  415/622-2018
          FAX:  415/622-4585


          Domestic and Offshore Lending Office:
          1850 Gateway Boulevard
          Concord, California 94520


          Place of Payment:
          Bank of America National Trust and Savings Association
          ABA #121-000-358-S.F.
          1850 Gateway Boulevard
          Concord, CA  94520
          Account # 12331 83980; Ref. The Pacific Lumber Company

          Telephone:  510/657-7350
          FAX: 510/675-7531
          Attention:  Terry Peach



                                 EXHIBIT A

                            NOTICE OF BORROWING


                                             Date:  __________, ____


To:  Bank of America National Trust and Savings Association (the "Bank")

     Re:  Amended and Restated Credit Agreement dated as of ________ __,
1998 (as extended, renewed, amended or restated from time to
time, the "Credit Agreement") between The Pacific Lumber Company
and Bank of America National Trust and Savings Association.

Ladies and Gentlemen:

          The undersigned, The Pacific Lumber Company (the "Company"),
refers to the Credit Agreement, the terms defined therein being used herein
as therein defined, and hereby gives you notice irrevocably, pursuant to
Section 2.03 of the Credit Agreement, of the proposed Loan specified below:

          1.   The Business Day of the proposed Loan is  __________ __,
19__.

          2.   The Loan is to be a Loan under the [Revolving]  [Term]
Credit.

          3.   The Loan is to be a $__________ [Base Rate] [Offshore Rate]
Loan.

          [4.  The duration of the Interest Period for the Offshore Rate
Loan is _____ months.]

          The undersigned hereby certifies that the following statements
are true on the date hereof, and will be true on the date of the proposed
Loan, before and after giving effect thereto and to the application of the
proceeds therefrom:

          (a)  the representations and warranties of the Company contained
in Article V of the Credit Agreement are true and correct as though made on
and as of such date (except to the extent such representations and
warranties relate to an earlier date, in which case they are true and
correct as of such date);

          (b)  no Default or Event of Default has occurred and is
continuing, or would result from such proposed Loan; and

          (c)  The proposed Loan will not cause the aggregate principal
amount of all outstanding Loans plus the L/C Obligations to exceed the
lesser of the Commitment or the Borrowing Base.

          [(d) The proceeds of the proposed Term Loan will be used to pay
for the Acquisition Costs of Timberlands which will be immediately
encumbered by Deed(s) of Trust in favor of the Bank.]


                                   THE PACIFIC LUMBER COMPANY



                                   By:
                                   Name:
                                   Title:






                                 EXHIBIT B

                     NOTICE OF CONVERSION/CONTINUATION


                                             Date:  __________, ____


To:  Bank of America National Trust and Savings Association (the "Bank")

          Re:  Amended and Restated Credit Agreement dated as of _________
__, 1998 (as extended, renewed, amended or restated from time to time, the
"Credit Agreement") between The Pacific Lumber Company and Bank of America
National Trust and Savings Association.

Ladies and Gentlemen:

          The undersigned, The Pacific Lumber Company (the "Company"),
refers to the Credit Agreement, the terms defined therein being used herein
as therein defined, and hereby gives you notice irrevocably, pursuant to
Section 2.04 of the Credit Agreement, of the [conversion] [continuation] of
the Loans specified herein, that:

          1.   The date of the [conversion] [continuation] is __________
__, 19__

          2.   The Loans covered by this notice are Loans under the
[Revolving] [Term] Credit.

          3.   The aggregate amount of the Loans [converted] [continued] is
$__________.

          4.   The Loans are to be [converted into] [continued as]
[Offshore Rate] [Base Rate] Loans.

          5.   [If applicable:]  The duration of the Interest Period for
the Loans included in the [conversion] [continuation] shall be [____ days]
[_____ months].

          [If Loans are to be converted into or continued as Offshore Rate
Loans:]  The undersigned hereby certifies that the following statements are
true on the date hereof, and will be true on the date of the proposed
[conversion] [continuation], before and after giving effect thereto and to
the application of the proceeds therefrom:

          (a)  the representations and warranties of the Company contained
in Article V of the Credit Agreement are true and correct as though made on
and as of such date (except to the extent such representations and
warranties relate to an earlier date, in which case they are true and
correct as of such date); and

          (b)  no Default or Event of Default has occurred and is
continuing, or would result from such proposed [conversion] [continuation].

                                   THE PACIFIC LUMBER COMPANY



                                   By:
                                   Name:
                                   Title:


<TABLE> <S> <C>

<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Company's consolidated balance sheet and consolidated statement of operations
and is qualified in its entirety by reference to such consolidated financial
statements together with the related footnotes thereto.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
       
<S>                             <C>
<PERIOD-TYPE>                   12-MOS
<FISCAL-YEAR-END>                          DEC-31-1998
<PERIOD-START>                             JAN-01-1998
<PERIOD-END>                               DEC-31-1998
<EXCHANGE-RATE>                                      1
<CASH>                                         150,800
<SECURITIES>                                    11,700
<RECEIVABLES>                                   17,600
<ALLOWANCES>                                         0
<INVENTORY>                                     44,000
<CURRENT-ASSETS>                               232,100
<PP&E>                                         480,700
<DEPRECIATION>                                 178,400
<TOTAL-ASSETS>                                 952,200
<CURRENT-LIABILITIES>                           66,900
<BONDS>                                        998,500
                                0
                                          0
<COMMON>                                             0
<OTHER-SE>                                   (134,500)
<TOTAL-LIABILITY-AND-EQUITY>                   952,200
<SALES>                                        233,600
<TOTAL-REVENUES>                               233,600
<CGS>                                          155,300
<TOTAL-COSTS>                                  155,300
<OTHER-EXPENSES>                                37,700
<LOSS-PROVISION>                                     0
<INTEREST-EXPENSE>                              91,600
<INCOME-PRETAX>                               (27,300)
<INCOME-TAX>                                     9,300
<INCOME-CONTINUING>                           (18,000)
<DISCONTINUED>                                       0
<EXTRAORDINARY>                               (41,800)
<CHANGES>                                            0
<NET-INCOME>                                  (59,800)
<EPS-PRIMARY>                                        0
<EPS-DILUTED>                                        0
        

</TABLE>


                  REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS


To MAXXAM Inc.:

We have audited the accompanying consolidated balance sheets of MAXXAM Inc.
(a Delaware corporation) and subsidiaries as of December 31, 1998 and 1997,
and the related consolidated statements of operations, cash flows and
stockholders' deficit for each of the three years in the period ended
December 31, 1998.  These financial statements and the schedule referred to
below are the responsibility of the Company's management.  Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards.  Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement.  An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements.  An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation.  We believe that our audits
provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of MAXXAM
Inc. and subsidiaries as of December 31, 1998 and 1997, and the results of
their operations and their cash flows for each of the three years in the
period ended December 31, 1998, in conformity with generally accepted
accounting principles.

Our audits were made for the purpose of forming an opinion on the basic
consolidated financial statements taken as a whole.  The schedule listed in
Item 14(a)(2) of this Form 10-K is presented for purposes of complying with
the Securities and Exchange Commission's rules and is not part of the basic
consolidated financial statements.  This schedule has been subjected to the
auditing procedures applied in the audits of the basic consolidated
financial statements and, in our opinion, is fairly stated in all material
respects in relation to the basic consolidated financial statements taken
as a whole.



                                        ARTHUR ANDERSEN LLP


Houston, Texas
March 1, 1999

                        MAXXAM INC. AND SUBSIDIARIES

                         CONSOLIDATED BALANCE SHEET
               (IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS)


<TABLE>
<CAPTION>

                                                           DECEMBER 31,
                                                   ---------------------------
                                                        1998          1997
                                                   ------------  -------------
<S>                                                <C>           <C>
ASSETS
Current assets:
     Cash and cash equivalents                     $      294.2  $      164.6 
     Marketable securities                                 19.4          84.6 
     Receivables:
          Trade, net of allowance for doubtful
               accounts of $6.4 and $5.9,
               respectively                               184.5         255.9 
          Other                                           122.6         126.3 
     Inventories                                          587.5         629.6 
     Prepaid expenses and other current assets            152.4         175.1 
                                                   ------------  ------------ 
               Total current assets                     1,360.6       1,436.1 
Property, plant and equipment, net of accumulated
     depreciation of $921.5 and $845.6,
     respectively                                       1,278.9       1,320.9 
Timber and timberlands, net of accumulated
     depletion of $178.4 and $169.2, 
     respectively                                         302.3         299.1 
Investments in and advances to unconsolidated
     affiliates                                           146.5         159.5 
Deferred income taxes                                     555.8         479.9 
Long-term receivables and other assets                    431.1         418.7 
                                                   ------------  ------------ 
                                                   $    4,075.2  $    4,114.2 
                                                   ============  ============ 
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
     Accounts payable                              $      182.9  $      187.3 
     Accrued interest                                      72.4          68.7 
     Accrued compensation and related benefits            133.7         159.3 
     Other accrued liabilities                            180.6         174.9 
     Payable to affiliates                                 77.1          82.9 
     Short-term borrowings and current maturities
          of long-term debt                                37.0          69.0 
                                                   ------------  ------------ 
               Total current liabilities                  683.7         742.1 
Long-term debt, less current maturities                 1,971.7       1,888.0 
Accrued postretirement medical benefits                   704.5         730.1 
Other noncurrent liabilities                              604.8         586.3 
                                                   ------------  ------------ 
               Total liabilities                        3,964.7       3,946.5 
Commitments and contingencies
Minority interests                                        167.3         170.6 
Stockholders' deficit:
     Preferred stock, $.50 par value; 12,500,000
          shares authorized; Class A $.05
          Non-Cumulative Participating Convertible
               Preferred Stock; 669,435 shares
               issued                                        .3            .3 
     Common stock, $0.50 par value; 28,000,000
          shares authorized; 10,063,359 shares
          issued                                            5.0           5.0 
     Additional capital                                   222.8         222.8 
     Accumulated deficit                                 (175.7)       (118.5)
     Accumulated other comprehensive loss                     -          (3.3)
     Treasury stock, at cost (shares held: 
          preferred - 845; common - 3,062,496 and
          3,062,762, respectively)                       (109.2)       (109.2)
                                                   ------------  ------------ 
               Total stockholders' deficit                (56.8)         (2.9)
                                                   ------------  ------------ 
                                                   $    4,075.2  $    4,114.2 
                                                   ============  ============ 



<FN>

The accompanying notes are an integral part of these financial statements.

</TABLE>

                        MAXXAM INC. AND SUBSIDIARIES

                    CONSOLIDATED STATEMENT OF OPERATIONS
               (IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS)


<TABLE>
<CAPTION>

                                                     YEARS ENDED DECEMBER 31,
                                            ----------------------------------------
                                                 1998          1997          1996
                                            ------------  ------------  ------------
<S>                                         <C>           <C>           <C>
Net sales:
     Aluminum operations                    $    2,256.4  $    2,373.2  $    2,190.5 
     Forest products operations                    233.6         287.2         264.6 
     Real estate and racing operations              82.7          68.7          88.2 
                                            ------------  ------------  ------------ 
                                                 2,572.7       2,729.1       2,543.3 
                                            ------------  ------------  ------------ 
Costs and expenses:
     Costs of sales and operations:
          Aluminum operations                    1,906.2       1,951.2       1,857.5 
          Forest products operations               155.3         162.0         148.5 
          Real estate and racing
               operations                           49.2          42.4          67.4 
     Selling, general and administrative
          expenses                                 171.0         190.0         203.5 
     Depreciation, depletion and
          amortization                             120.4         127.4         135.1 
     Impairment of aluminum assets                  45.0             -             - 
     Restructuring of aluminum operations              -          19.7             - 
                                            ------------  ------------  ------------ 
                                                 2,447.1       2,492.7       2,412.0 
                                            ------------  ------------  ------------ 

Operating income                                   125.6         236.4         131.3 

Other income (expense):
     Investment, interest and other income          36.3          49.7          41.1 
     Interest expense                             (201.3)       (201.4)       (175.5)
     Amortization of deferred financing
          costs                                     (7.2)        (10.2)         (9.0)
                                            ------------  ------------  ------------ 
Income (loss) before income taxes,
     minority interests
     and extraordinary item                        (46.6)         74.5         (12.1)
Credit for income taxes                             32.1           6.9          44.9 
Minority interests                                   (.2)        (16.2)         (9.9)
                                            ------------  ------------  ------------ 
Income (loss) before extraordinary item            (14.7)         65.2          22.9 
                                                                                     
Extraordinary item:
     Loss on early extinguishment of debt,
          net of income tax benefit
               of $22.9                            (42.5)            -             - 
                                            ------------  ------------  ------------ 
Net income (loss)                           $      (57.2) $       65.2  $       22.9 
                                            ============  ============  ============ 
Basic earnings (loss) per common share:
     Income (loss) before extraordinary
          item                              $      (2.10) $       7.81  $       2.63 
     Extraordinary item                            (6.07)            -             - 
                                            ------------  ------------  ------------ 
     Net income (loss)                      $      (8.17) $       7.81  $       2.63 
                                            ============  ============  ============ 

Diluted earnings (loss) per common and
     common equivalent share:
     Income (loss) before extraordinary
          item                              $      (2.10) $       7.14  $       2.42 
     Extraordinary item                            (6.07)            -             - 
                                            ------------  ------------  ------------ 
     Net income (loss)                      $      (8.17) $       7.14  $       2.42 
                                            ============  ============  ============ 



<FN>

The accompanying notes are an integral part of these financial statements.

</TABLE>


                        MAXXAM INC. AND SUBSIDIARIES

                    CONSOLIDATED STATEMENT OF CASH FLOWS
                          (IN MILLIONS OF DOLLARS)


<TABLE>
<CAPTION>

                                                            YEARS ENDED DECEMBER 31,
                                                   ----------------------------------------
                                                        1998          1997          1996
                                                   ------------  ------------  ------------
<S>                                                <C>           <C>           <C>
Cash flows from operating activities:
     Net income (loss)                             $      (57.2) $       65.2  $       22.9 
     Adjustments to reconcile net income (loss)                       
          to net cash provided
          by operating activities:
          Depreciation, depletion and amortization        120.4         127.4         135.1 
          Impairment of aluminum assets                    45.0             -             - 
          Extraordinary loss on early
               extinguishment of debt                      42.5             -             - 
          Restructuring of aluminum operations                -          19.7             - 
          Minority interests                                 .2          16.2           9.9 
          Amortization of deferred financing costs
               and discounts on long-term debt             17.9          24.8          21.5 
          Equity in (earnings) loss of
               unconsolidated affiliates, net of
               dividends received                           (.5)         23.3           3.0 
          Net gain on sales of real estate,
               mortgage loans and other assets                -          (7.9)        (23.7)
          Net gains on marketable securities               (8.6)        (18.1)         (7.8)
          Net sales (purchases) of marketable
               securities                                  73.8         (16.2)          3.4 
          Increase (decrease) in cash resulting                 
               from changes in:
               Receivables                                 70.1         (86.1)         60.4 
               Inventories                                 38.7            .4         (30.6)
               Prepaid expenses and other assets           (3.5)         (9.8)        (33.3)
               Accounts payable                            (4.7)        (14.8)          4.8 
               Accrued interest                             4.0           8.4           6.2 
               Accrued and deferred income taxes          (23.9)         (4.4)        (46.0)
               Payable to affiliates and other
                    liabilities                           (74.1)        (67.5)        (74.0)
          Other                                             5.1           8.0           4.2 
                                                   ------------  ------------  ------------ 
               Net cash provided by operating
                    activities                            245.2          68.6          56.0 
                                                   ------------  ------------  ------------ 
Cash flows from investing activities:
     Capital expenditures                                (122.1)       (164.5)       (173.1)
     Investment in subsidiaries and joint ventures        (10.6)         (7.2)         (2.4)
     Restricted cash withdrawals used to acquire
          timberlands                                       8.9             -             - 
     Net proceeds from disposition of property and
          investments                                      23.1          40.6          51.8 
     Other                                                  2.9          (7.8)         (1.4)
                                                   ------------  ------------  ------------ 
               Net cash used for investing
                    activities                            (97.8)       (138.9)       (125.1)
                                                   ------------  ------------  ------------ 
Cash flows from financing activities:
     Proceeds from issuance of long-term debt             875.5          30.1         371.8 
     Premium for early retirement of debt                 (45.5)            -             - 
     Redemptions, repurchase of and principal
          payments on long-term debt                     (804.0)        (78.4)        (32.8)
     Net borrowings (payments) under revolving and
          short-term credit facilities                     16.0           2.5         (13.8)
     Restricted cash withdrawals (deposits), net            7.3          (3.7)           .4 
     Dividends paid to Kaiser's minority preferred
          stockholders                                        -          (4.2)        (10.5)
     Redemption of preference stock                        (8.7)         (2.1)         (5.2)
     Treasury stock repurchases                           (35.1)        (52.8)         (1.8)
     Incurrence of deferred financing costs               (23.4)         (1.8)        (12.1)
     Other                                                   .1           8.7           5.5 
                                                   ------------  ------------  ------------ 
               Net cash provided by (used for)
                    financing activities                  (17.8)       (101.7)        301.5 
                                                   ------------  ------------  ------------ 
Net increase (decrease) in cash and cash
     equivalents                                          129.6        (172.0)        232.4 
Cash and cash equivalents at beginning of year            164.6         336.6         104.2 
                                                   ------------  ------------  ------------ 
Cash and cash equivalents at end of year           $      294.2  $      164.6  $      336.6 
                                                   ============  ============  ============ 


<FN>

The accompanying notes are an integral part of these financial statements.

</TABLE>



                        MAXXAM INC. AND SUBSIDIARIES
              CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT 
                          (IN MILLION OF DOLLARS)




<TABLE>
<CAPTION>




                                                                                     ACCUMULATED
                        PREFERRED       COMMON STOCK      ADDI-         ACCUMU-         OTHER
                          STOCK    ---------------------  TIONAL         LATED      COMPREHENSIVE
                       ($.50 PAR)    SHARES   ($.50 PAR)  CAPITAL        DEFICIT        INCOME
                       ----------  ---------- ---------- ----------   -----------   ---------------
<S>                    <C>         <C>        <C>        <C>            <C>           <C>
Balance, December                                                                          
     31, 1995          $       .3         8.7 $      5.0 $       155.0  $     (208.5) $        (16.1)
     Net income                 -           -          -             -          22.9               - 
     Reduction of
          pension
          liability             -           -          -             -             -            11.0 
     Comprehensive
          income
     Gain from
          issuance of
          Kaiser                                                                           
          common stock          -           -          -            .9             -               - 
     Treasury stock                                                                        
          repurchases           -           -          -             -             -               - 
                       ----------- ---------- ---------- -------------  ------------  ---------------
Balance, December 31, 
     1996                      .3         8.7        5.0         155.9        (185.6)           (5.1)
     Net income                 -           -          -             -          65.2               - 
     Reduction of
          pension                                                                          
          liability             -           -          -             -             -             1.8 
     Comprehensive
          income
     Gain from
          issuance of
          Kaiser
          Aluminum
          Corporation                                                                      
          common stock
          due to
          PRIDES
          conversion            -           -          -          62.9           1.9               - 
     Gain from other
          issuances
          of Kaiser                                                                        
          Aluminum
          Corporation
          common stock          -           -          -           1.1             -               - 
     Treasury stock                                                                        
          repurchases           -        (1.7)         -             -             -               - 
     Gain on   
          settlement
          of share-                                                                        
          holder
          litigation            -           -          -           2.9             -               - 
                       ----------- ---------- ---------- -------------  ------------  --------------
Balance, December
     31, 1997                                                                              
                               .3         7.0        5.0         222.8        (118.5)           (3.3)
     Net loss                   -           -          -             -         (57.2)              - 
     Reduction of
          pension                                                                          
          liability             -           -          -             -             -             3.3 
     Comprehensive
          loss
Balance, December
     31, 1998          $       .3         7.0 $      5.0 $       222.8  $     (175.7)      $       - 
                       ==========  =========  ========== ============   ============  ==============

<CAPTION>


                            TREASURY                  COMPREHENSIVE
                             STOCK           TOTAL        INCOME
                        ---------------  ------------ -------------
 <S>                    <C>              <C>          <C>
 Balance, December
      31, 1995          $         (19.5) $      (83.8)
      Net income                      -          22.9 $        22.9 
      Reduction of
           pension                    -          11.0          11.0 
           liability                                  -------------
      Comprehensive                                    
           income                                     $        33.9
                                                      =============
      Gain from
           issuance
           of Kaiser
           common stock               -            .9 
      Treasury stock
           repurchases             (1.8)         (1.8)
                        ---------------  ------------
 Balance, December
      31, 1996                    (21.3)        (50.8)
      Net income                      -          65.2 $        65.2 
      Reduction of
           pension
           liability                  -           1.8           1.8 
                                                      -------------
      Comprehensive                       
           income                                     $        67.0 
                                                      =============
      Gain from
           issuance
           of Kaiser
           Aluminum
           Corporation
           common stock
           due to PRIDES
           conversion                 -          64.8 
      Gain from other
           issuances
           of Kaiser
           Aluminum
           Corporation
           common stock               -           1.1 
      Treasury stock
           repurchases            (87.9)        (87.9)
      Gain on
           settlement
           of share-
           holder
           litigation                 -           2.9 
                         --------------  ------------
 Balance, December
      31, 1997                   (109.2)         (2.9)
      Net loss                        -         (57.2)$       (57.2)
      Reduction of
           pension
           liability                  -           3.3           3.3 
                                                      -------------
      Comprehensive
           loss                                       $       (53.9)
                                                      =============
 Balance, December
      31, 1998          $        (109.2) $      (56.8)
                        ==============   ============




<FN>

The accompanying notes are an integral part of these financial statements.

</TABLE>


                        MAXXAM INC. AND SUBSIDIARIES

                 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


1.        BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
          POLICIES

     BASIS OF PRESENTATION

          The Company
          The consolidated financial statements include the accounts of
MAXXAM Inc. and its majority and wholly owned subsidiaries.  All references
to the "COMPANY" include MAXXAM Inc. and its majority owned and wholly
owned subsidiaries, unless otherwise indicated or the context indicates
otherwise.  Intercompany balances and transactions have been eliminated. 
Investments in affiliates (20% to 50%-owned) are accounted for utilizing
the equity method of accounting.  Certain reclassifications have been made
to prior years' financial statements to be consistent with the current
year's presentation.

          The Company is a holding company and, as such, conducts
substantially all of its operations through its subsidiaries.  The Company
operates in four principal industries: aluminum, through its majority owned
subsidiary, Kaiser Aluminum Corporation ("KAISER," 63% owned as of December
31, 1998), an integrated aluminum producer; forest products, through MAXXAM
Group Inc. ("MGI") and MGI's wholly owned subsidiaries, principally The
Pacific Lumber Company ("PACIFIC LUMBER") and Britt Lumber Co., Inc.
("BRITT"); real estate investment and development, managed through its
wholly owned subsidiary, MAXXAM Property Company, and racing operations
through  Sam Houston Race Park, Ltd. ("SHRP, LTD."), a Texas limited
partnership, in which the Company owned a 98.2% interest as of December 31,
1998.  In 1998 and 1997, the Company increased its ownership in SHRP, Ltd.
to 98.2% from the 78.8% interest held during 1996.  MAXXAM Group Holdings
Inc. ("MGHI") owns 100% of MGI and is a wholly owned subsidiary of the
Company.

          Description of the Company's Operations
          Kaiser operates in the aluminum industry through its wholly owned
principal operating subsidiary, Kaiser Aluminum & Chemical Corporation
("KACC").  KACC operates in several principal aspects of the aluminum
industry - the mining of bauxite (the major aluminum-bearing ore), the
refining of bauxite into alumina (the intermediate material), the
production of aluminum and the manufacture of fabricated and semi-
fabricated aluminum products.  KACC's production levels of alumina and
primary aluminum exceed its internal processing needs, which allows it to
be a major seller of alumina and primary aluminum in domestic and
international markets.  A substantial portion of the Company's consolidated
assets, liabilities, revenues, results of operations and cash flows are
attributable to Kaiser (see Note 14).

          Pacific Lumber operates in several principal aspects of the
lumber industry - the growing and harvesting of redwood and Douglas-fir
timber, the milling of logs into lumber and the manufacture of lumber into
a variety of finished products.  Britt manufactures redwood and cedar
fencing and decking products from small diameter logs, a substantial
portion of which are obtained from Pacific Lumber.  Housing, construction
and remodeling markets are the principal markets for the Company's lumber
products. 

          The Company, principally through its wholly owned subsidiaries,
is also engaged in the business of residential and commercial real estate
investment and development, primarily in Puerto Rico, Arizona and
California.  Racing operations are conducted through SHRP, Ltd. which owns
and operates a Class 1, pari-mutuel horse racing facility in the greater
Houston metropolitan area. 

          Use of Estimates and Assumptions
          The preparation of financial statements in accordance with
generally accepted accounting principles requires the use of estimates and
assumptions that affect (i) the reported amounts of assets and liabilities,
(ii) disclosure of contingent assets and liabilities known to exist as of
the date the financial statements are published, and (iii) the reported
amount of revenues and expenses recognized during each period presented. 
The Company reviews all significant estimates affecting its consolidated
financial statements on a recurring basis and records the effect of any
necessary adjustments prior to their publication.  Adjustments made with
respect to the use of estimates often relate to improved information not
previously available.  Uncertainties with respect to such estimates and
assumptions are inherent in the preparation of the Company's consolidated
financial statements; accordingly, it is possible that the subsequent
resolution of any one of the contingent matters described in Note 12 could
differ materially from current estimates.  The results of an adverse
resolution of such uncertainties could have a material effect on the
Company's consolidated financial position, results of operations or
liquidity.

     SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

          Cash Equivalents
          Cash equivalents consist of highly liquid money market
instruments with original maturities of three months or less.

          Marketable Securities
          Marketable securities, which consist of corporate bonds and long
and short positions in corporate common stocks are carried at fair value.
The cost of the securities sold is determined using the first-in, first-out
method.  Included in investment, interest and other income for each of the
three years in the period ended December 31, 1998 were:  1998 - net
unrealized holding losses of $3.8 million and net realized gains of $11.9
million; 1997 - net unrealized holding gains of $5.0 million and net
realized gains of $11.9 million; and 1996 - net unrealized holding losses
of $.8 million and net realized gains of $8.1 million.

          Inventories
          Inventories are stated at the lower of cost or market.  Cost for
the aluminum and forest products operations inventories is primarily
determined using the last-in, first-out ("LIFO") method.  Other inventories
of the aluminum operations, principally operating supplies and repair and
maintenance parts, are stated at the lower of average cost or market. 
Inventory costs consist of material, labor and manufacturing overhead,
including depreciation and depletion.

          Inventories consist of the following (in millions):


<TABLE>
<CAPTION>



                                                           DECEMBER 31,
                                                   --------------------------
                                                        1998          1997
                                                   ------------  ------------
<S>                                                <C>           <C>
Aluminum operations:
     Finished fabricated products                  $       112.4 $       103.9
     Primary aluminum and work in process                  205.6         226.6
     Bauxite and alumina                                   109.5         108.4
     Operating supplies and repair and maintenance
          parts                                            116.0         129.4
                                                   ------------- -------------
                                                           543.5         568.3
                                                   ------------- -------------
Forest products operations:
     Lumber                                                 36.0          49.7
     Logs                                                    8.0          11.6
                                                   ------------- -------------
                                                            44.0          61.3
                                                   ------------- -------------
                                                   $       587.5 $       629.6
                                                   ============= =============


</TABLE>

          Property, Plant and Equipment
          Property, plant and equipment is stated at cost, net of
accumulated depreciation.  Depreciation is computed principally utilizing
the straight-line method at rates based upon the estimated useful lives of
the various classes of assets.  The carrying value of property, plant and
equipment is assessed when events and circumstances indicate that an
impairment is present.  Impairment is determined by measuring undiscounted
future cash flows.  If an impairment is present, the asset is reported at
the lower of carrying value or fair value.

          Timber and Timberlands
          Timber and timberlands are stated at cost, net of accumulated
depletion.  Depletion is computed utilizing the unit-of-production method
based upon estimates of timber values and quantities.

          Deferred Financing Costs
          Costs incurred to obtain financing are deferred and amortized
over the estimated term of the related borrowing.

          Restricted Cash
          At December 31, 1998, cash and cash equivalents includes $28.4
million, which is reserved for debt service payments on the Company's Class
A-1, Class A-2 and Class A-3 Timber Collateralized Notes due 2028 (the
"TIMBER NOTES").  At December 31, 1997, cash and cash equivalents includes 
$17.8 million, which was reserved for debt service payments on the
Company's 7.95% Timber Collateralized Notes due 2015 (the "OLD TIMBER
NOTES").  Long-term receivables and other assets include restricted cash in
the amount of $17.5 million and $33.7 million at December 31, 1998 and
December 31, 1997, respectively.  The restricted cash at December 31, 1998
primarily represents the amount held in an account by the trustee (the
"PREFUNDING ACCOUNT") under the indenture governing the Timber Notes (the
"TIMBER NOTES INDENTURE ") to enable Scotia Pacific Company LLC ("SCOTIA
LLC"), a limited liability company wholly owned by Pacific Lumber, to
acquire timberlands.  The restricted cash at December 31, 1997 primarily
represents the amount held by the trustee in the liquidity account (the
"LIQUIDITY ACCOUNT") maintained by Scotia Pacific Holding Company ("SCOTIA
PACIFIC"), a wholly owned subsidiary of Pacific Lumber merged into Scotia
LLC, with respect to the Old Timber Notes for the benefit of holders of the
Old Timber Notes under the indenture governing the Old Timber Notes.  

          Also included in cash and cash equivalents at December 31, 1998
and 1997 is restricted cash of $67.7 million and $26.4 million,
respectively, held in an interest-bearing account  as security for short
positions in marketable securities.

          Concentrations of Credit Risk
          The amounts restricted for debt service payments on the Timber
Notes held in an account by the trustee (the "PAYMENT ACCOUNT") and held in
the Prefunding Account for purchase of timberlands are invested primarily
in commercial paper and other short-term investments.  The Company
mitigates its concentration of credit risk with respect to these restricted
cash deposits by purchasing only high grade investments (ratings of A1/P1
short-term or AAA/aaa long-term debt) having maturities of less than three
months.  No more than 10% is invested within the same issue.

          Investment, Interest and Other Income
          Investment, interest and other income for the years ended
December 31, 1998, 1997 and 1996 includes $12.7 million, $8.8 million, and
$3.1 million, respectively, of pre-tax charges related principally to
establishing additional litigation reserves for asbestos claims net, of
estimated insurance recoveries, pertaining to operations which were
discontinued prior to the acquisition of Kaiser by the Company in 1988. 
Other income in 1998 includes $12.0 million attributable to insurance
recoveries related to certain environmental costs incurred.  Also included
in investment, interest and other income are net gains from sales of real
estate of $7.1 million, $10.4 million and $25.4 million for the years ended
December 31, 1998, 1997 and 1996, respectively.

          Foreign Currency Translation
          The Company uses the United States dollar as the functional
currency for its foreign operations.

          Derivative Financial Instruments
          Hedging transactions using derivative financial instruments are
primarily designed to mitigate KACC's exposure to changes in prices for
certain of the products which KACC sells and consumes and, to a lesser
extent, to mitigate KACC's exposure to changes in foreign currency exchange
rates. KACC does not utilize derivative financial instruments for trading
or other speculative purposes. KACC's derivative activities are initiated
within guidelines established by Kaiser's management and approved by KACC's
and Kaiser's boards of directors. Hedging transactions are executed
centrally on behalf of all of KACC's business segments to minimize
transactions costs, monitor consolidated net exposures and allow for
increased responsiveness to changes in market factors.

          Most of KACC's hedging activities involve the use of option
contracts (which establish a maximum and/or minimum amount to be paid or
received) and forward sales contracts (which effectively fix or lock-in the
amount KACC will pay or receive).  Option contracts typically require the
payment of an up-front premium in return for the right to receive the
amount (if any) by which the price at the settlement date exceeds the
strike price.  Any interim fluctuations in prices prior to the settlement
date are deferred until the settlement date of the underlying hedged
transaction, at which point they are reflected in net sales or cost of
sales and operations (as applicable) together with the related premium
cost.  Forward sales contracts do not require an up-front payment and are
settled by the receipt or payment of the amount by which the price at the
settlement date varies from the contract price.  No accounting recognition
is accorded to interim fluctuations in prices of forward sales contracts.

          KACC has established margin accounts and credit limits with
certain counterparties related to open forward sales and option contracts. 
When unrealized gains or losses are in excess of such credit limits, KACC
is entitled to receive advances from the counterparties on open positions
or is required to make margin deposits to counterparties as the case may
be.  At December 31, 1998, KACC had received $9.9 million of margin
advances from counterparties.  At December 31, 1997, KACC had neither
received nor made any margin deposits.  Kaiser considers credit risk
related to possible failure of the counterparties to perform their
obligations pursuant to the derivative contracts to be minimal.  Deferred
gains or losses are included in prepaid expenses and other current assets
and other accrued liabilities.  See Note 13.

          Fair Value of Financial Instruments
          The carrying amounts of cash equivalents and restricted cash
approximate fair value.  Marketable securities are carried at fair value
which is determined based on quoted market prices.  As of December 31, 1998
and 1997, the estimated fair value of long-term debt was $1,939.9 million
and $2,010.6 million, respectively.  The estimated fair value of long-term
debt is determined based on the quoted market prices for the publicly
traded issues and on the current rates offered for borrowings similar to
the other debt.  Some of the Company's publicly traded debt issues are
thinly traded financial instruments; accordingly, their market prices at
any balance sheet date may not be representative of the prices which would
be derived from a more active market.

          Stock-Based Compensation
          The Company applies the "intrinsic value" method described by
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" and related interpretations to account for stock and stock-
based compensation awards (see Note 11).  In accordance with Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-
Based Compensation," the Company calculated pro forma compensation cost for
all stock options granted using the "fair value" method.  The fair value of
the stock options granted were estimated using the Black-Scholes option
pricing model.  The Company's pro forma income (loss) before extraordinary
item and diluted earnings (loss) per share before extraordinary item would
have been $(17.8) million and $(2.54) per share, respectively, for the year
ended December 31, 1998,  $64.0 million and $7.00 per share, respectively,
for the year ended December 31, 1997, and $22.3 million and $2.36 per
share, respectively, for the year ended December 31, 1996.

          Per Share Information
          Basic earnings (loss) per share is calculated by dividing net
income (loss) by the weighted average number of common shares outstanding
during the period including the weighted average impact of the shares of
common stock issued and treasury stock acquired during the year from the
date of issuance or repurchase.  The weighted average common shares
outstanding was 7,000,663 shares, 8,357,062 shares and 8,700,269 shares for
the years ended December 31, 1998, 1997 and 1996, respectively.

          Diluted earnings (loss) per share calculations also include the
dilutive effect of the Class A Preferred Stock which is convertible into
Common Stock as well as common and preferred stock options.  The weighted
average number of common and common equivalent shares was 7,812,377 shares,
9,143,920 shares and 9,465,051 shares for the years ended December 31,
1998, 1997 and 1996, respectively.  The impact of outstanding convertible
stock and stock options of 811,714 was excluded from the weighted average
share calculation for the year ended December 31, 1998, as its effect would
have been antidilutive.

          Labor Related Costs
          Kaiser is currently operating five of its United States
facilities with salaried employees and other workers as a result of the
September 30, 1998 strike by the United Steelworkers of America ("USWA")
and the subsequent "lock-out" by Kaiser in January 1999.  For purposes of
computing the benefit related costs and liabilities to be reflected in the
accompanying consolidated financial statements for the year ended December
31, 1998 (such as pension and other postretirement benefit
costs/liabilities), Kaiser has based its accruals on the terms  of the
previously existing (expired) USWA contract.  Any differences between the
amounts accrued and the amounts ultimately agreed to during the collective
bargaining process will be reflected in future results during the term of
any new contract.

          All incremental operating costs incurred as a result of the USWA
strike and subsequent lockout are being expensed as incurred.  Such costs
totaled approximately $50.0 million during 1998 (approximately $40.0
million of which were incurred in the fourth quarter).  Kaiser's fourth
quarter 1998 results also reflect reduced profitability of approximately
$10.0 million resulting from the strike-related curtailment of three
potlines (representing approximately 70,000 tons of annual capacity) at
Kaiser's Mead and Tacoma, Washington, smelters and certain other shipment
delays experienced at the other affected facilities at the outset of the
USWA strike.

2.        ACQUISITION

          During June 1997, Kaiser Bellwood Corporation, a wholly owned
subsidiary of KACC, completed the acquisition of the Reynolds Metals
Company's Richmond, Virginia, extrusion plant and its existing inventories
for a total purchase price of $41.6 million, consisting of cash payments of
$38.4 million and the assumption of approximately $3.2 million of employee
related and other liabilities.  Upon completion of the transaction, Kaiser
Bellwood Corporation became a subsidiary guarantor under the indentures in
respect of the KACC 9-7/8% Senior Notes, KACC 10-7/8% Senior Notes, and
KACC 12-3/4% Senior Subordinated Notes (all as defined below).

3.        RESTRUCTURING OF OPERATIONS

          During the second quarter of 1997, Kaiser recorded a $19.7
million restructuring charge to reflect actions taken and plans initiated
to achieve reduced production costs, decreased corporate selling, general
and administrative expenses, and enhanced product mix.  The significant
components of the restructuring charge were:  (i) a net loss of
approximately $1.4 million as a result of the contribution of certain net
assets of KACC's Erie, Pennsylvania fabrication plant in connection with
the formation of AKW L.P. ("AKW")(50% owned), an aluminum wheels joint
venture formed with a third party in May 1997, and the subsequent decision
to close the remainder of the Erie plant in order to consolidate its
forging operations into two other facilities; (ii) a charge of $15.6
million associated with asset dispositions regarding product
rationalization and geographical optimization, and (iii) a charge of
approximately $2.7 million for benefit and other costs associated with the
consolidation or elimination of certain corporate and other staff
functions.

4.        INVESTMENTS IN AND ADVANCES TO UNCONSOLIDATED AFFILIATES

          Summary combined financial information is provided below for
unconsolidated aluminum investments, most of which supply and process raw
materials.  The investees are Queensland Alumina Limited ("QAL") (28.3%
owned), Kaiser Jamaica Bauxite Company (49% owned) and Anglesey Aluminium
Limited ("ANGLESEY") (49% owned).  KACC provides some of its affiliates
with services such as financing, management and engineering.  Purchases
from these affiliates for the acquisition and processing of bauxite,
alumina and primary aluminum aggregated $235.1 million, $245.2 million and
$281.6 million for the years ended December 31, 1998, 1997 and 1996,
respectively.  KACC's equity in earnings (loss) before income taxes of such
operations is treated as a reduction (increase) in cost of sales.  As of
December 31, 1998 and 1997, KACC's net receivable from these affiliates was
an immaterial amount.

          Kaiser, principally through KACC, has a variety of financial
commitments, including purchase agreements, tolling arrangements, forward
foreign exchange and forward sales contracts (see Note 13), letters of
credit and guarantees.  Such purchase agreements and tolling arrangements
include long-term agreements for the purchase and tolling of bauxite into
alumina in Australia by QAL.  These obligations expire in 2008.  Under the
agreements, KACC is unconditionally obligated to pay its proportional share
of debt, operating costs and certain other costs of QAL.  The aggregate
minimum amount of required future principal payments at December 31, 1998
is $97.6 million, of which approximately $12.0 million is due in each of
2000 and 2001 with the balance being due thereafter.  KACC's share of
payments, including operating costs and certain other expenses under the
agreements, has ranged between $100.0 million and $120.0 million per year
over the past three years.  KACC also has agreements to supply alumina to
and to purchase aluminum from Anglesey.

          The summary combined financial information for the year ended
December 31, 1998 and 1997 also contains the balances and results of AKW. 
During early 1999, Kaiser signed a letter of intent to sell its interest in
AKW.   See Note 17 (in millions):


<TABLE>
<CAPTION>



                                                            DECEMBER 31,
                                                    ---------------------------
                                                         1998          1997
                                                    ------------- -------------
<S>                                                 <C>           <C>
Current assets                                      $       356.0 $       393.0
Long-term assets (primarily property, plant and
     equipment, net)                                        393.9         395.0
                                                    ------------- -------------

     Total assets                                   $       749.9 $       788.0
                                                    ============= =============
Current liabilities                                 $        92.2 $       117.1
Long-term liabilities (primarily long-term debt)            396.6         400.8
Stockholders' equity                                        261.1         270.1
                                                    ------------- -------------
     Total liabilities and stockholders' equity     $       749.9 $       788.0
                                                    ============= =============


</TABLE>


<TABLE>
<CAPTION>

                                                      YEARS ENDED DECEMBER 31,
                                             ----------------------------------------
                                                  1998          1997          1996
                                             ------------  ------------  ------------
<S>                                          <C>           <C>           <C>
Net sales                                    $      659.2  $      644.1  $      660.5 
Costs and expenses                                 (651.7)       (637.8)       (631.5)
Provision for income taxes                           (2.7)         (8.2)         (8.7)
                                             ------------  ------------  ------------
Net income (loss)                            $        4.8  $       (1.9) $       20.3 
                                             ============  ============  ============
Kaiser's equity in earnings                  $        5.4  $        2.9  $        8.8 
                                             ============  ============  ============

Dividends received                           $        5.5  $       10.7  $       11.8 
                                             ============  ============  ============


</TABLE>

          Kaiser's equity in earnings differs from the summary net income
(loss) due to various percentage ownerships in the entities and equity
method accounting adjustments.  At December 31, 1998, Kaiser's investment
in its unconsolidated affiliates exceeded its equity in their net assets by
approximately $18.2 million which amount will be fully amortized over the
next two years.  Amortization of the excess investment totaling $10.0
million, $11.4 million, and $11.6 million is included in depreciation,
depletion and amortization for the years ended December 31, 1998, 1997 and
1996, respectively.

          Other Investees
          In 1995, pursuant to a joint venture agreement with SunCor
Development Company ("SUNCOR") for the purpose of developing, managing and
selling a real estate project, the Company, through a wholly owned real
estate subsidiary, contributed 950 acres of undeveloped land valued at
$10.0 million in exchange for a 50% initial interest in the joint venture. 
SunCor, the managing partner, contributed $10.0 million in cash in exchange
for its 50% initial interest.  At December 31, 1998, the joint venture had
assets of $28.0 million, liabilities of $8.7 million and equity of $19.3
million.  At December 31, 1997, the joint venture had assets of $32.9
million, liabilities of $10.5 million and equity of $22.4 million.  For the
years ended December 31, 1998, 1997 and 1996, the joint venture had income
of $3.8 million, $3.8 million and $2.3 million, respectively.

          In October 1998, pursuant to a joint agreement with Westbrook
Firerock LLC ("WESTBROOK") for the purpose of developing, managing and
selling a real estate project, the Company, through a wholly owned real
estate subsidiary, contributed 808 acres of undeveloped land having an
agreed upon value of $11.0 million in exchange for a 50% initial interest
in the joint venture.  Westbrook contributed $5.5 million in cash and an
obligation to fund an additional $5.5 million as needed by the joint
venture, which is secured by an irrevocable letter of credit.  At December
31, 1998, the joint venture had assets of $17.6 million, liabilities of
$1.1 million and equity of $16.5 million.  For the year ended December 31,
1998, the joint venture's income was not significant.

5.        PROPERTY, PLANT AND EQUIPMENT

          The major classes of property, plant and equipment are as follows
(in millions):


<TABLE>
<CAPTION>


                                           ESTIMATED            DECEMBER 31,
                                             USEFUL     --------------------------
                                             LIVES           1998          1997
                                         -------------  ------------  ------------
<S>                                      <C>            <C>           <C>
Land and improvements                     5 - 30 years  $      225.9  $      206.1 
Buildings                                 5 - 45 years         328.0         324.5 
Machinery and equipment                   3 - 22 years       1,595.8       1,568.8 
Construction in progress                                        50.7          67.1 
                                                        ------------  ------------ 
                                                             2,200.4       2,166.5 
Less:  accumulated depreciation                               (921.5)       (845.6)
                                                        ------------  ------------ 
                                                        $    1,278.9  $    1,320.9 
                                                        ============  ============ 


</TABLE>

          Depreciation expense for the years ended December 31, 1998, 1997
and 1996 was $97.7 million, $99.9 million and $105.9 million, respectively. 


          During the fourth quarter of 1998, KACC decided to seek a
strategic partner for further development and deployment of its
Micromill(TM) technology.  While technological progress has been good,
management concluded that additional time and investment will be required
to achieve commercial success.  Given Kaiser's other strategic priorities,
Kaiser believes that bringing in added commercial and financial resources
is the appropriate course of action for capturing the maximum long-term
value.  This change in strategic course required a different accounting
treatment, and Kaiser correspondingly recorded a $45.0 million impairment
charge to reduce the carrying value of the Micromill assets to
approximately $25.0 million.


6.        SHORT-TERM BORROWINGS

          During 1998 and 1997, the Company had average short-term
borrowings outstanding of $18.6 million and $9.0 million, respectively,
under the debt instruments described below.  The weighted average interest
rate during 1998 and 1997 was 9.1% and 9.8%, respectively.

          MAXXAM Loan Agreement (the "CUSTODIAL TRUST AGREEMENT")
          On October 19, 1998, the Company drew down $16.0 million, the
amount available as of such date, under the Custodial Trust Agreement which
provided for up to $25.0 million in borrowings.   The borrowing converted
to a term loan  bearing interest at LIBOR plus 2% per annum and maturing on
October 21, 1999 as provided under the terms of the agreement.  The loan is
secured by 7,915,000 shares of Kaiser common stock.

          Demand Note
          On November 26, 1997, the Company entered into a credit facility
with an investment bank providing for up to $25.0 million in borrowings
payable on demand.  Borrowings are secured by 400,000 shares of Kaiser
common stock for each $1.0 million of borrowings.  As of December 31, 1998,
$2.5 million of borrowings were outstanding under this facility.  No
additional borrowings were available under this facility as of December 31,
1998 as the per share market price for the Kaiser common stock was below
the $8.50 minimum required by the facility.

          Notes to NL Industries, Inc. ("NL") and the Combined Master
               Retirement Trust ("CMRT")
          On May 14, 1998, the Company repaid the $35.1 million 10% one-
year notes issued to NL and CMRT in connection with the October 1997
repurchase of 1,277,250 shares of the Company's common stock.  

7.        LONG-TERM DEBT

          Long-term debt consists of the following (in millions):


<TABLE>
<CAPTION>

                                                            DECEMBER 31,
                                                    --------------------------
                                                         1998          1997
                                                    ------------  ------------
<S>                                                 <C>           <C>
12% MGHI Senior Secured Notes due August 1, 2003    $      130.0  $      130.0 
11-1/4% MGI Senior Secured Notes due August 1, 2003            -         100.0 
12-1/4% MGI Senior Secured Discount Notes due
     August 1, 2003,                                           -         117.3 
     net of discount
10-1/2% Pacific Lumber Senior Notes due March 1,
     2003                                                      -         235.0 
Pacific Lumber Credit Agreement                                -           9.4 
7.43% Scotia LLC Timber Collateralized Notes due
     July 20, 2028                                         867.2             - 
7.95% Scotia Pacific Timber Collateralized Notes
     due July 20, 2015                                         -         320.0 
1994 KACC Credit Agreement                                     -             - 
10-7/8% KACC Senior Notes due October 15, 2006,
     including premium                                     225.7         225.8 
9-7/8% KACC Senior Notes due February 15, 2002, net
     of discount                                           224.4         224.2 
12-3/4% KACC Senior Subordinated Notes due February
     1, 2003                                               400.0         400.0 
Alpart CARIFA Loans                                         60.0          60.0 
Other aluminum operations debt                              52.9          61.6 
Other notes and contracts, primarily secured by
     receivables, buildings, real estate
     and equipment                                         30.0           36.1 
                                                    ------------  ------------
                                                         1,990.2       1,919.4 
          Less: current maturities                         (18.5)        (31.4)
                                                    ------------  ------------
                                                    $    1,971.7  $    1,888.0 
                                                    ============  ============


</TABLE>

          12% MGHI Senior Secured Notes due 2003 (the "MGHI NOTES")
          The MGHI Notes due August 1, 2003 are guaranteed on a senior,
unsecured basis by the Company.  The common stock of MGI serves as security
for the MGHI Notes.  Interest is payable semi-annually.  In connection with
the redemption of the 11-1/4% MGI Senior Secured Notes due 2003 and 12-1/4% 
MGI Senior Secured Discount Notes due 2003 (collectively, the "MGI NOTES")
and the issuance of the Timber Notes (discussed below), MGHI amended the
indenture for the MGHI Notes, to among other things, pledge all of the
27,938,250 shares of Kaiser common stock it owns, 16,055,000 shares of
which were released from the pledge securing the MGI Notes.

          The net proceeds from the offering of the MGHI Notes after
estimated expenses were approximately $125.0 million, all of which was
loaned to the Company pursuant to an intercompany note (the "INTERCOMPANY
NOTE") which is pledged to secure the MGHI Notes.  The Intercompany Note
bears interest at the rate of 11% per annum (payable semi-annually on the
interest payment dates applicable to the MGHI Notes) and matures on August
1, 2003.  The Company is entitled to defer the payment of interest on the
Intercompany Note on any interest payment date to the extent that MGHI has
sufficient available funds to satisfy its obligations on the MGHI Notes on
such date.  Any such deferred interest will be added to the principal
amount of the Intercompany Note and will be payable at maturity.  Interest
deferred on the Intercompany Note as of December 31, 1998 amounted to $7.8
million.  An additional $7.3 million of interest was deferred on February
1, 1999.

          Pacific Lumber Credit Agreement
          On December 18, 1998, the Pacific Lumber Credit Agreement was
amended and restated as a new three-year senior secured credit facility
which expires on October 31, 2001.  The new facility allows for borrowings
of up to $60 million, all of which may be used for revolving borrowings,
$20 million of which may be used for standby letters of credit and $30
million of which may be used for timberland acquisitions.  Borrowings would
be secured by all of Pacific Lumber's domestic accounts receivable and
inventory.  Borrowings for timberland acquisitions would also be secured by
the acquired timberlands and, commencing in April 2001, are to be repaid
annually from 50% of Pacific Lumber's cash flow (as defined).  The
remaining excess cash flow is available for dividends.  Upon maturity of
the facility, all outstanding borrowings used for timberland acquisitions
will convert to a term loan repayable over four years.  As of December 31,
1998, $27.5 million of borrowings was available under the agreement, no
borrowings were outstanding and letters of credit outstanding amounted to
$14.4 million. 

          Scotia LLC Timber Collateralized Notes due 2028
          On July 20, 1998, Scotia LLC issued $867.2 million aggregate
principal amount of  Timber Notes which have an overall effective interest
rate of 7.43% per annum.  Net proceeds from the offering of the Timber
Notes were used primarily to prepay the Old Timber Notes and to redeem the
10-1/2% Pacific Lumber Senior Notes due 2003 ("PACIFIC LUMBER SENIOR
NOTES") and the MGI Notes effective August 19, 1998.  The Company
recognized an extraordinary loss of $42.5 million, net of the related
income tax benefit of $22.9 million, in 1998 for the early extinguishment
of the Old Timber Notes, the Pacific Lumber Senior Notes and the MGI Notes. 
Concurrently with the issuance of the Timber Notes, (i) Scotia Pacific was
merged into Scotia LLC, (ii) Pacific Lumber transferred to Scotia LLC
approximately 13,500 acres of timberlands and the timber and timber
harvesting rights with respect to an additional 19,700 acres of
timberlands, and (iii) Scotia LLC transferred to Pacific Lumber the timber
and timber harvesting rights related to approximately 1,400 acres of
timberlands.

          Under the Timber Notes Indenture, the business activities of
Scotia LLC are generally limited to the ownership and operation of its
timber and timberlands.  The Timber Notes are senior secured obligations of
Scotia LLC and are not obligations of, or guaranteed by, Pacific Lumber or
any other person.  The Timber Notes are secured by a lien on (i) Scotia
LLC's timber and timberlands (representing $252.0 million of the Company's
consolidated timber and timberlands balance at December 31, 1998), and (ii)
substantially all of Scotia LLC's other property.  Interest on the Timber
Notes is further secured by a line of credit agreement between Scotia LLC
and a bank pursuant to which Scotia LLC may borrow to pay interest on the
Timber Notes.  The Timber Notes Indenture permits Scotia LLC to have
outstanding up to $75.0 million of non-recourse indebtedness to acquire
additional timberlands and to issue additional timber notes provided
certain conditions are met (including repayment or redemption of the $160.7
million of Class A-1 Timber Notes).  

          The Timber Notes are structured to link, to the extent of cash
available, the deemed depletion of Scotia LLC's timber (through the harvest
and sale of logs) to the required amortization of the Timber Notes.  The
required amount of amortization on any Timber Notes payment date is
determined by various mathematical formulas set forth in the Timber Notes
Indenture.  The minimum amount of principal which Scotia LLC must pay (on a
cumulative basis and subject to available cash) through any Timber Notes
payment date in order to avoid an Event of Default is referred to as
Minimum Principal Amortization.  If the Timber Notes were amortized in
accordance with Minimum Principal Amortization, the final installment of
principal would be paid on July 20, 2028.  The minimum amount of principal
which Scotia LLC must pay (on a cumulative basis) through any Timber Notes
payment date in order to avoid payment of prepayment or deficiency premiums
is referred to as Scheduled Amortization.  If all payments of principal are
made in accordance with Scheduled Amortization, the payment date on which
Scotia LLC will pay the final installment of principal is January 20, 2014. 
Such final installment would include a single bullet principal payment of
$463.3 million related to the Class A-3 Timber Notes.

          Principal and interest on the Timber Notes are payable semi-
annually on January 20 and July 20.  The Timber Notes are redeemable at the
option of Scotia LLC at any time.  The redemption price of the Timber Notes
is equal to the sum of the principal amount, accrued interest and a
prepayment premium calculated based upon the yield of like term Treasury
securities plus 50 basis points.

          As a result of the sale of approximately 5,600 acres of Pacific
Lumber's timberlands consisting of two forest groves commonly referred to
as the Headwater Forest and Elk Head Springs Forest (the "HEADWATERS
TIMBERLANDS") on March 1, 1999, Salmon Creek received proceeds of $299.9
million in cash.  See Note 12 to the Consolidated Financial Statements. 
Salmon Creek has deposited approximately $285.0 million of such proceeds
into an escrow  account (the  "ESCROWED FUNDS"), pursuant to an escrow
agreement (the "ESCROW AGREEMENT") as necessary to support the Timber
Notes.   The net proceeds of the sale of the Grizzly Creek grove will also
be placed in escrow (on the same basis as the net proceeds of the sale of
the Headwaters Timberlands) unless, at the time of receipt of such
proceeds, funds are no longer on deposit under the Escrow Agreement.

          Under the Escrow Agreement, the Escrowed Funds will be released
by the Escrow Agent only in accordance with resolutions duly adopted by the
Board of Managers of Scotia LLC and, unless the resolutions authorize the
payment of funds exclusively to, or to the order of, the Trustee or the
Collateral Agent under the Timber Notes Indenture, only if one or more of
the following conditions are satisfied:  (a) the resolutions authorizing
the release of the Escrowed Funds are adopted by a majority of the Board of
Managers of Scotia LLC (including the affirmative vote of the two
independent managers); (b) a Rating Agency Confirmation (as defined in the
Timber Notes Indenture) has been received that gives effect to the
release or disposition of funds directed by the resolutions; or (c) Scotia
LLC has received an opinion from a nationally recognized investment banking
firm to the effect that, based on the revised harvest schedule and the
other assumptions provided to such firm, the funds that would be available
to Scotia LLC based on such harvest schedule, assumptions and otherwise
under the Timber Notes Indenture after giving effect to the release or
disposition of funds directed by such resolutions would be adequate (i) to
pay Scheduled Amortization (as defined in the Timber Notes Indenture) on
the Class A-1 and Class A-2 Timber Notes and (ii) to amortize the Class A-3
Timber Notes on a schedule consistent with the original harvest schedule as
of July 9, 1998 (assuming that the Class A-3 Timber Notes are not
refinanced on January 20, 2014).

          1994 KACC Credit Agreement (as amended, the "KACC CREDIT
               AGREEMENT")
          KACC is able to borrow under this facility through August 2001 by
means of revolving credit advances and letters of credit (up to $125.0
million) in an aggregate amount equal to the lesser of $325.0 million or a
borrowing base relating to eligible accounts receivable plus eligible
inventory.  As of February 28, 1999, $274.1 million (of which $74.1 million
could have been used for letters of credit) was available under the KACC
Credit Agreement.  The KACC Credit Agreement is unconditionally guaranteed
by Kaiser and by certain significant subsidiaries of KACC.  Outstanding
balances bear interest at a premium (which varies based on the results of a
financial test) over either a base rate or LIBOR, at KACC's option.  

          The KACC Credit Agreement requires KACC to comply with certain
financial covenants and places restrictions on Kaiser's and KACC's ability
to, among other things, incur debt and liens, make investments, pay
dividends, undertake transactions with affiliates, make capital
expenditures and enter into unrelated lines of business.  The KACC Credit
Agreement is secured by, among other things, (i) mortgages on KACC's major
domestic plants (excluding KACC's Gramercy alumina plant and Micromill
facility), (ii) subject to certain exceptions, liens on the accounts
receivable, inventory, equipment, domestic patents and trademarks and
substantially all other personal property of KACC and certain of its
subsidiaries, (iii) a pledge of all of the stock of KACC owned by Kaiser,
and (iv) pledges of all of the stock of a number of KACC's wholly owned
domestic subsidiaries, pledges of a portion of the stock of certain foreign
subsidiaries and pledges of a portion of the stock of certain partially
owned foreign affiliates. 

          10-7/8 % KACC Senior Notes due 2006 (the "KACC 10-7/8 % SENIOR
               NOTES"),
          9-7/8 % KACC Senior Notes due 2002 (the "KACC 9-7/8 % SENIOR
               NOTES") and
          12-3/4 % KACC Senior Subordinated Notes due 2003 (the "KACC
               SENIOR SUBORDINATED NOTES" and collectively, the "KACC
               NOTES")
          The KACC Notes, are guaranteed, jointly and severally, by certain
subsidiaries of KACC.  The indentures governing the KACC Notes, (the "KACC
INDENTURES") restrict, among other things, KACC's ability to incur debt,
undertake transactions with affiliates, and pay dividends.  Furthermore,
the KACC Indentures provide that KACC must offer to purchase the KACC Notes
upon the occurrence of a Change of Control (as defined therein).  Under the
most restrictive of the covenants in the KACC Indentures and the KACC
Credit Agreement, neither Kaiser nor KACC currently is permitted to pay
dividends on their common stock. 

          Alpart CARIFA Loans
          In December 1991, Alumina Partners of Jamaica ("ALPART", a
majority owned subsidiary of KACC) entered into a loan agreement with the
Caribbean Basin Projects Financing Authority ("CARIFA").  Alpart's
obligations under the loan agreement are secured by two letters of credit
aggregating $64.2 million.  KACC is a party to one of the two letters of
credit in the amount of $41.7 million in respect of its ownership interest
in Alpart.  Alpart has also agreed to indemnify bondholders of CARIFA for
certain tax payments that could result from events, as defined, that
adversely affect the tax treatment of the interest income on the bonds.

          Maturities
          Scheduled maturities and redemptions of long-term debt
outstanding at December 31, 1998 are as follows (in millions):


<TABLE>
<CAPTION>


                                                          YEARS ENDING DECEMBER 31,
                             -----------------------------------------------------------------------------------
                                  1999          2000          2001          2002          2003       Thereafter
                             ------------  ------------- ------------- ------------- ------------- -------------
<S>                          <C>           <C>           <C>           <C>           <C>           <C>
12% MGHI Senior Secured
     Notes                   $          -  $           - $           - $           - $       130.0 $           -
7.43% Scotia LLC Timber
     Collateralized Notes             8.2           15.9          16.3          17.1          19.3         790.4
10-7/8% KACC Senior Notes               -              -             -             -             -         225.7
9-7/8% KACC Senior Notes                -              -             -         224.4             -             -
12-3/4% KACC Senior
     Subordinated Notes                 -              -             -             -         400.0             -
Alpart CARIFA Loans                     -              -             -             -             -          60.0
Other aluminum operations
     debt                             0.4            0.3           0.3           0.3           0.3          51.3
Other                                 9.9            3.8           3.6           1.2           1.1          10.4
                             ------------  ------------- ------------- ------------- ------------- -------------
                             $       18.5  $        20.0 $        20.2 $       243.0 $       550.7 $     1,137.8
                             ============  ============= ============= ============= ============= =============


</TABLE>

          Capitalized Interest
          Interest capitalized during the years ended December 31, 1998,
1997 and 1996 was $3.5 million, $7.2 million and $5.0 million,
respectively.

          Restricted Net Assets of Subsidiaries and Pledges of Subsidiary
          Stock
          Certain debt instruments restrict the ability of the Company's
subsidiaries to transfer assets, make loans and advances and pay dividends
to the Company.  As of December 31, 1998, all of the assets relating to the
Company's aluminum, forest products, real estate and other operations are
subject to such restrictions.  The Company could eliminate all of such
restrictions with respect to approximately $194.6 million of the Company's
real estate assets with the extinguishment of $27.4 million of debt.  The
Company and MGHI have pledged a total of 36,853,250 shares of Kaiser common
stock (representing a 47% interest in Kaiser) under various indentures and
loan agreements.

8.        INCOME TAXES

          Income taxes are determined using an asset and liability approach
which requires the recognition of deferred income tax assets and
liabilities for the expected future tax consequences of events that have
been recognized in the Company's financial statements or tax returns. 
Under this method, deferred income tax assets and liabilities are
determined based on the temporary differences between the financial
statement and tax bases of assets and liabilities using enacted tax rates.

          Income (loss) before income taxes, minority interests and
extraordinary item by geographic area is as follows (in millions):


<TABLE>
<CAPTION>

                                                      YEARS ENDED DECEMBER 31,
                                             ----------------------------------------
                                                  1998          1997          1996
                                             ------------  ------------  ------------
<S>                                          <C>           <C>           <C>
Domestic                                     $     (118.7) $      (93.0) $      (55.0)
Foreign                                              72.1         167.5          42.9 
                                             ------------  ------------  ------------ 
                                             $      (46.6) $       74.5  $      (12.1)
                                             ============  ============  ============ 

</TABLE>

          Income taxes are classified as either domestic or foreign based
on whether payment is made or due to the United States or a foreign
country.  Certain income classified as foreign is subject to domestic
income taxes.

          The credit (provision) for income taxes on income (loss) before
income taxes, minority interests and extraordinary item consists of the
following (in millions):

<TABLE>
<CAPTION>
                                                      YEARS ENDED DECEMBER 31,
                                             ----------------------------------------
                                                  1998          1997          1996
                                             ------------  ------------  ------------
<S>                                          <C>           <C>           <C>
Current:
     Federal                                 $       (1.8) $       (1.5) $       (1.5)
     State and local                                  (.4)          (.4)          (.5)
     Foreign                                        (16.5)        (28.7)        (21.8)
                                             ------------  ------------  ------------
                                                    (18.7)        (30.6)        (23.8)
                                             ------------  ------------  ------------
Deferred:
     Federal                                         54.9          48.4          42.6 
     State and local                                  8.4          (3.9)         18.5 
     Foreign                                        (12.5)         (7.0)          7.6 
                                             ------------  ------------  ------------
                                                     50.8          37.5          68.7 
                                             ------------  ------------  ------------
                                             $       32.1  $        6.9  $       44.9 
                                             ============  ============  ============


</TABLE>

          A reconciliation between the credit for income taxes and the
amount computed by applying the federal statutory income tax rate to income
(loss) before income taxes, minority interests and extraordinary item is as
follows (in millions):


<TABLE>
<CAPTION>


                                                      YEARS ENDED DECEMBER 31,
                                             ----------------------------------------
                                                  1998          1997          1996
                                             ------------  ------------  ------------
<S>                                          <C>           <C>           <C>
Income (loss) before income taxes, minority
     interests 
     and extraordinary item                  $      (46.6) $       74.5  $      (12.1)
                                             ============  ============  ============

Amount of federal income tax credit
     (provision) based upon the
     statutory rate                          $       16.3  $      (26.1) $        4.2 
Revision of prior years' tax estimates and                                            
     other changes in valuation allowances           14.5          33.8          41.2 
Percentage depletion                                  3.2           4.2           3.9 
Foreign taxes, net of federal tax benefit            (1.9)         (3.1)         (5.5)
State and local taxes, net of federal tax
     effect                                           (.6)         (2.8)          1.1 
Other                                                  .6            .9             - 
                                             ------------  ------------  ------------
                                             $       32.1  $        6.9  $       44.9 
                                             ============  ============  ============


</TABLE>

          The revision of prior years' tax estimates and other changes in
valuation allowances, as shown in the table above, includes amounts for the
reversal of reserves which the Company no longer believes are necessary,
other revisions in prior years' tax estimates and changes in valuation
allowances with respect to deferred income tax assets.  Generally, the
reversal of reserves relates to the expiration of the relevant statute of
limitations with respect to certain income tax returns or the resolution of
specific income tax matters with the relevant tax authorities.  For the
years ended December 31, 1998, 1997 and 1996, the reversal of reserves
which the Company believes are no longer necessary resulted in a credit to
the income tax provision of $11.5 million, $32.1 million and $40.8 million,
respectively.

          The components of the Company's net deferred income tax assets
(liabilities) are as follows (in millions):


<TABLE>
<CAPTION>
                                                            DECEMBER 31,
                                                    --------------------------
                                                         1998          1997
                                                    ------------  ------------
<S>                                                 <C>           <C>
Deferred income tax assets:
     Postretirement benefits other than pensions    $      284.0  $      293.1 
     Loss and credit carryforwards                         199.1         148.3 
     Other liabilities                                     174.6         219.6 
     Costs capitalized only for tax purposes                62.8          45.2 
     Real estate                                            41.8          48.1 
     Timber and timberlands                                 37.4          34.2 
     Other                                                  89.0          82.5 
     Valuation allowances                                 (123.1)       (126.4)
                                                    ------------  ------------
          Total deferred income tax assets, net            765.6         744.6 
                                                    ------------  ------------
Deferred income tax liabilities:
     Property, plant and equipment                        (116.0)       (145.6)
     Other                                                 (84.8)        (95.1)
                                                    ------------  ------------
          Total deferred income tax liabilities           (200.8)       (240.7)
                                                    ------------  ------------
Net deferred income tax assets                      $      564.8  $      503.9 
                                                    ============  ============


</TABLE>

          As of December 31, 1998, approximately $378.2 million of the net
deferred income tax assets listed above are attributable to Kaiser.  A
principal component of this amount is the $249.6 million tax benefit, net
of certain valuation allowances, associated with the accrual for
postretirement benefits other than pensions.  The future tax deductions
with respect to the turnaround of this accrual will occur over a thirty to
forty-year period.  If such deductions create or increase a net operating
loss, Kaiser has the ability to carry forward such loss for 20 taxable
years.  For reasons discussed below, the Company believes a long-term view
of profitability is appropriate and has concluded that this net deferred
income tax asset will more likely than not be realized.  Included in the
remaining $128.6 million of Kaiser's net deferred income tax assets is
approximately $55.0 million attributable to the tax benefit of loss and
credit carryforwards, net of valuation allowances.  A substantial portion
of the valuation allowances for Kaiser relate to loss and credit
carryforwards.  The Company evaluated all appropriate factors to determine
the proper valuation allowances for these carryforwards, including any
limitations concerning their use, the year the carryforwards expire and the
levels of taxable income necessary for utilization.  For example, full
valuation allowances were provided for certain credit carryforwards that
expire in the near term.  With regard to future levels of income, the
Company believes that Kaiser, based on the cyclical nature of its business,
its history of operating earnings and its expectations for future years,
will more likely than not generate sufficient taxable income to realize the
benefit attributable to the loss and credit carryforwards for which
valuation allowances were not provided.  

          The net deferred income tax assets listed above which are not
attributable to Kaiser are approximately $186.6 million as of December
31, 1998.  This amount includes approximately $100.8 million attributable
to the tax benefit of loss and credit carryforwards, net of valuation
allowances.  Based on an evaluation of the appropriate factors, as discussed
above, to determine the proper valuation allowances for these carryforwards,
the Company believes that it is more likely than not that it will realize
the benefit for these carryforwards for which valuation allowances were not
provided. Also included is approximately $70.3 million which relates to the
excess of the tax basis over financial statement basis with respect to
timber and timberlands and real estate.  The Company has concluded that
it is more likely than not that these net deferred income tax assets will
be realized based in part upon the estimated values of the underlying assets
which are in excess of their tax basis.

          As of December 31, 1998 and 1997, $56.6 million and $58.8
million, respectively, of the net deferred income tax assets listed above
are included in prepaid expenses and other current assets. Certain other
portions of the deferred income tax liabilities listed above are included
in other accrued liabilities and other noncurrent liabilities.

          The Company files consolidated federal income tax returns
together with its domestic subsidiaries, other than Kaiser and its
subsidiaries.  Kaiser and its domestic subsidiaries are members of a
separate consolidated return group which files its own consolidated federal
income tax returns.

          The following table presents the tax attributes for federal
income tax purposes at December 31, 1998 attributable to the Company and
Kaiser (in millions).  The utilization of certain of these tax attributes
is subject to limitations.

<TABLE>
<CAPTION>


                                               THE COMPANY                   KAISER
                                      --------------------------  ---------------------------
                                                       EXPIRING                    EXPIRING
                                                       THROUGH                     THROUGH
                                                    ------------                -------------
<S>                                   <C>           <C>           <C>           <C>
Regular Tax Attribute Carryforwards:
     Current year net operating loss  $       160.3          2018 $           -             -
     Prior year net operating losses          106.6          2012          28.2          2012
     General business tax credits                .5          2002           4.9          2011
     Foreign tax credits                          -             -          48.4          2003
     Alternative minimum tax credits            1.8    Indefinite          23.4    Indefinite

Alternative Minimum Tax Attribute
  Carryforwards:
     Current year net operating loss  $       165.4          2018 $           -             -
     Prior year net operating losses          118.1          2012           6.2          2011
     Foreign tax credits                          -             -          87.2          2003


</TABLE>

          The income tax provisions related to other comprehensive income
were $0.6 million and $6.5 million for the years ended December 31, 1997
and 1996, respectively.  There was no tax provision related to other
comprehensive income for the year ended December 31, 1998.

9.        EMPLOYEE BENEFIT AND INCENTIVE PLANS

          In the fourth quarter of 1998, the Company adopted Statement of
Financial Accounting Standards No. 132, "Employers' Disclosures About
Pension and Other Postretirement Benefits" ("SFAS NO. 132"), which amends
Statements of Financial Accounting Standards Nos. 87, 88 and 106.  SFAS No.
132, among other things, standardizes the disclosure requirements for
pensions and other postretirement benefits and suggests combined formats
for presentation of such disclosures, but has no impact on the computation
of the reported amounts.  Prior year disclosures have been revised to
comply with SFAS No. 132.

          Pension and Other Postretirement Benefit Plans
          The Company has various retirement plans which cover essentially
all employees.  Most of the Company's employees are covered by defined
benefit plans.  The benefits are determined under formulas based on the
employee's years of service, age and compensation.  The Company's funding
policy is to contribute annually an amount at least equal to the minimum
cash contribution required by ERISA.

          The Company has unfunded postretirement medical benefit plans
which cover most of its employees.  Under the plans, employees are eligible
for health care benefits (and life insurance benefits for Kaiser employees)
upon retirement.  Retirees from companies other than Kaiser make
contributions for a portion of the cost of their health care benefits.  The
expected costs of postretirement medical benefits are accrued over the
period the employees provide services to the date of their full eligibility
for such benefits.  Postretirement medical benefits are generally provided
through a self insured arrangement.  The Company has not funded the
liability for these benefits, which are expected to be paid out of cash
generated by operations.

The following tables present the changes, status and assumptions of the
Company's pension and other postretirement benefit plans as of December 31,
1998 and 1997, respectively (in millions):


<TABLE>
<CAPTION>



                                        PENSION BENEFITS         MEDICAL/LIFE BENEFITS
                                  --------------------------  --------------------------
                                                  YEARS ENDED DECEMBER 31,
                                  ------------------------------------------------------
                                       1998          1997          1998          1997
                                  ------------  ------------  ------------  ------------
<S>                               <C>           <C>           <C>           <C>
Change in benefit obligation:
     Benefit obligation at
          beginning of year       $      918.0  $      854.7  $      551.7  $      610.9 
     Service cost                         16.8          15.8           4.6           6.5 
     Interest cost                        63.1          64.6          37.9          45.3 
     Plan participants'
          contributions                      -             -            .3            .3 
     Plan amendments                         -            .9             -             - 
     Actuarial (gain) loss                17.3          66.9          70.9         (67.7)
     Currency exchange rate
          change                           (.4)         (6.0)            -             - 
     Curtailments and settlements         (4.6)            -           4.0             - 
     Benefits paid                       (85.7)        (78.9)        (45.9)        (43.6)
                                  ------------  ------------  ------------  ------------
          Benefit obligation at
               end of year               924.5         918.0         623.5         551.7 
                                  ------------  ------------  ------------  ------------

Change in plan assets:
     Fair value of plan assets at
          beginning of year              799.3         698.1             -             - 
     Actual return on assets             112.5         138.5             -             - 
     Settlements                          (5.5)            -             -             - 
     Employer contributions               29.5          41.7          45.6          43.3 
     Plan participants'
          contributions                      -             -            .3            .3 
     Benefits paid                       (85.7)        (78.9)        (45.9)        (43.6)
                                  ------------  ------------  ------------  ------------
     Fair value of plan assets at
          end of year                    850.1         799.4             -             - 
                                  ------------  ------------  ------------  ------------

     Benefit obligation in excess
          of plan assets                  74.4         118.6         623.5         551.7 
     Unrecognized actuarial gain          31.7           7.2          59.2         137.4 
     Unrecognized prior service
          costs                          (19.7)        (23.5)         70.0          86.3 
     Intangible asset and other            4.3           5.4             -             - 
                                  ------------  ------------  ------------  ------------
          Accrued benefit
               liability          $       90.7  $      107.7  $      752.7  $      775.4 
                                  ============  ============  ============  ============ 



</TABLE>

          With respect to Kaiser's pension plans, the benefit obligation
was $872.5 million and $873.0 million as of December 31, 1998 and 1997,
respectively.  This obligation exceeded Kaiser's fair value of plan assets
by $70.7 million and $116.1 million as of December 31, 1998 and 1997,
respectively.

          The postretirement medical/life benefit obligation attributable
to Kaiser's plans was $616.8 million and $544.5 million as of December 31,
1998 and 1997, respectively.  The postretirement medical/life benefit
liability recognized in the Company's Consolidated Balance Sheet
attributable to Kaiser's plans was $742.5 million and $765.6 million as of
December 31, 1998 and 1997, respectively.


<TABLE>
<CAPTION>


                                         PENSION BENEFITS                        MEDICAL/LIFE BENEFITS
                            -----------------------------------------  ----------------------------------------
                                                           YEAR ENDED DECEMBER 31,
                            -----------------------------------------------------------------------------------
                                 1998           1997          1996          1998          1997          1996
                            -------------  ------------  ------------  ------------  ------------  ------------
<S>                         <C>            <C>           <C>           <C>           <C>           <C>
Components of net periodic
     benefit costs:
     Service cost           $        16.8  $       15.8  $       15.7  $        4.6  $        6.5  $        4.3 
     Interest cost                   63.1          64.6          62.8          37.9          45.3          47.5 
     Expected return on
          assets                    (72.3)        (64.3)        (57.2)            -             -             - 
     Amortization of prior
          service costs               3.3           3.4           3.6         (12.5)        (12.5)        (12.5)
     Recognized net
          actuarial (gain)
          loss                        1.4           2.6           2.0          (7.2)          (.9)            - 
                            -------------  ------------  ------------  ------------  ------------  ------------
     Net periodic benefit
          costs                      12.3          22.1          26.9          22.8          38.4          39.3 
     Curtailments and
          settlements                 3.2           3.7           1.4             -             -             - 
                            -------------  ------------  ------------  ------------  ------------  ------------
          Adjusted net
               periodic
               benefit
               costs        $        15.5  $       25.8  $       28.3  $       22.8  $       38.4  $       39.3 
                            =============  ============  ============  ============  ============  ============



</TABLE>

          The net periodic pension costs attributable to Kaiser's plans was
$9.1 million, $19.2 million  and $23.4 million for the years ended December
31, 1998, 1997 and 1996, respectively.

          Included in the net periodic postretirement medical/life benefit
cost is $22.2 million, $37.6 million and $38.3 million for the years ended
December 31, 1998, 1997 and 1996, respectively, attributable to Kaiser's
plans.

          The aggregate fair value of plan assets and accumulated benefit
obligation for pension plans with plan assets in excess of accumulated benefit
obligations were $311.4 million and $298.3 million, respectively, as of
December 31, 1998 and $304.4 million and $299.4 million, respectively, as of
December 31, 1997.

<TABLE>
<CAPTION>
                                          PENSION BENEFITS                        MEDICAL/LIFE BENEFITS
                             -----------------------------------------  ---------------------------------------- 
                                                            YEAR ENDED DECEMBER 31,
                             -----------------------------------------------------------------------------------
                                  1998           1997          1996          1998          1997          1996
                             -------------  ------------  ------------  ------------  ------------  ------------
<S>                          <C>            <C>           <C>           <C>           <C>           <C>
Weighted-average
     assumptions:
     Discount rate                     7.0%          7.3%          7.8%          7.0%          7.3%          7.8%
     Expected return on plan
          assets                       9.5%          9.5%          9.5%          -             -             -   
     Rate of compensation
          increase                     5.0%          5.0%          5.0%          4.0%          5.0%          5.0%



</TABLE>

          In 1998, annual assumed rates of increase in the per capita cost
of covered benefits (i.e. health care cost trend rate) for non-HMO and HMO
participants are 6.5% and 5.0%, respectively, at all ages.  The assumed
rate of increase for non-HMO participants is assumed to decline gradually
to 5.0% in 2003 and remain at that level thereafter.  Assumed health care
cost trend rates have a significant effect on the amounts reported for the
health care plan.  A one-percentage-point change in assumed health care
cost trend rates as of December 31, 1998 would have the following effects
(in millions):


<TABLE>
<CAPTION>


                                    1-PERCENTAGE-  1-PERCENTAGE-
                                        POINT          POINT
                                       INCREASE       DECREASE
                                    ------------   ------------

 <S>                                    <C>           <C>

 Effect on total of service and                     
      interest cost components          $  6.0        $ (4.4)
 Effect on the postretirement
      benefit obligations                 65.3         (46.2)


</TABLE>

          Savings and Incentive Plans
          The Company has various defined contribution savings plans
designed to enhance the existing retirement programs of participating
employees.  Under the MAXXAM Inc. Savings Plan, employees may elect to
defer up to 16% of their base compensation to the plan.  For those
participants who have elected to defer a portion of their compensation, the
Company's matching contributions are dollar for dollar up to 4% of the
participant's contributions for each pay period.  Under the Kaiser Aluminum
Savings and Retirement Plan, salaried employees may elect to defer from 2%
to 18% of their compensation to the plan.  For those eligible participants
who have elected to make contributions to the plan, Kaiser's contributions
consist of matching 25% to 100% of contributions of up to 10% of their
compensation.  Kaiser has an unfunded incentive compensation program which
provides incentive compensation based upon performance against annual plans
and over rolling three-year periods.  Expenses incurred by the Company for
all of these plans were $9.3 million, $10.4 million and $(.1) million for
the years ended December 31, 1998, 1997 and 1996, respectively.

10.  MINORITY INTERESTS

          Minority interests represent the following (in millions):



<TABLE>
<CAPTION>

                                                            DECEMBER 31,
                                                    --------------------------
                                                         1998          1997
                                                    ------------  ------------
<S>                                                 <C>           <C>
Kaiser Aluminum Corporation:
     Common stock, par $.01                         $       44.8  $        42.9
     Minority interests attributable to Kaiser's
          subsidiaries                                     123.5          127.7
                                                    ------------  ------------
                                                    $      168.3  $       170.6
                                                    ============  ============


</TABLE>

          Conversion of PRIDES to Kaiser Common Stock
          During August 1997, the 8,673,850 outstanding shares of Kaiser's
8.255% PRIDES, Convertible Preferred Stock ("PRIDES") were converted into
7,227,848 shares of Kaiser common stock pursuant to the terms of the PRIDES
Certificate of Designations.  Further, in accordance with the PRIDES
Certificate of Designations no dividends were paid or payable for the
period June 30, 1997, to, but not including, the date of conversion.  As a
result of the equity attributable to the PRIDES being converted into equity
attributable to common stockholders, the Company recorded a $64.8 million
adjustment to stockholders' equity and a reduction in minority interest of
the same amount.

          KACC Redeemable Preference Stock
          In 1985, KACC issued its Cumulative (1985 Series A) Preference
Stock and its Cumulative (1985 Series B) Preference Stock (together, the
"REDEEMABLE PREFERENCE STOCK") each of which has a par value of $1 per
share and a liquidation and redemption value of $50 per share plus accrued
dividends, if any, and have a total redemption value of $21.1 million as of
December 31, 1998.  No additional Redeemable Preference Stock is expected
to be issued.  Holders of the Redeemable Preference Stock are entitled to
an annual cash dividend of $5 per share, or an amount based on a formula
tied to KACC's pre-tax income from aluminum operations when and as declared
by KACC's board of directors.

          The carrying values of the Redeemable Preference Stock are
increased each year to recognize accretion between the fair value (at which
the Redeemable Preference Stock was originally issued) and the redemption
value.  Changes in Redeemable Preference Stock are shown below.


<TABLE>
<CAPTION>

                                                   YEARS ENDED DECEMBER 31,
                                          ----------------------------------------
                                               1998          1997          1996
                                          ------------  ------------  ------------
<S>                                       <C>           <C>           <C>
Shares:
     Outstanding at beginning of year          595,053       634,684       737,363 
     Redeemed                                 (173,478)      (39,631)     (102,679)
                                          ------------  ------------  ------------ 
     Outstanding at end of year                421,575       595,053       634,684 
                                          ============  ============  ============ 


</TABLE>

          Redemption fund agreements require KACC to make annual payments
by March 31 of the subsequent year based on a formula tied to KACC's
consolidated net income until the redemption funds are sufficient to redeem
all of the Redeemable Preference Stock.  On an annual basis, the minimum
payment is $4.3 million and the maximum payment is $7.3 million.  KACC also
has certain additional repurchase requirements which are based, among other
things, upon profitability tests.

          The Redeemable Preference Stock is entitled to the same voting
rights as KACC common stock and to certain additional voting rights under
certain circumstances, including the right to elect, along with other KACC
preference stockholders, two directors whenever accrued dividends have not
been paid on two annual dividend payment dates or when accrued dividends in
an amount equivalent to six full quarterly dividends are in arrears. The
Redeemable Preference Stock restricts the ability of KACC to redeem or pay
dividends on its common stock if KACC is in default on any dividends
payable on Redeemable Preference Stock.

          Preference Stock
          KACC has four series of $100 par value Cumulative Convertible
Preference Stock ("$100 PREFERENCE STOCK") with annual dividend
requirements of between 4-1/8 % and 4-3/4 %.  KACC has the option to redeem
the $100 Preference Stock at par value plus accrued dividends.  KACC does
not intend to issue any additional shares of the $100 Preference Stock.

          The $100 Preference Stock can be exchanged for per share cash
amounts between $69 - $80.  KACC records the $100 Preference Stock at their
exchange amounts for financial statement presentation, and Kaiser includes
such amounts in minority interests.  At December 31, 1998 and 1997,
outstanding shares of $100 Preference Stock were 19,963 and 20,543,
respectively.

          Kaiser Common Stock Incentive Plans
          Kaiser has a total of 8,000,000 shares of Kaiser common stock
reserved for issuance under its incentive compensation programs.  At
December 31, 1998, 3,634,621 shares were available for issuance under these
plans.  Pursuant to Kaiser's nonqualified stock program, stock options are
granted at the prevailing market price, generally vest at the rate of 20%
to 33% per year and have a five or ten year term.  Information relating to
nonqualified stock options is shown below.  The prices shown in the table
below are the weighted average price per share for the respective number of
underlying shares.


<TABLE>
<CAPTION>


                                     1998                        1997                        1996
                         --------------------------  --------------------------- ---------------------------
                             SHARES        PRICE         SHARES        PRICE         SHARES        PRICE
                         ------------  ------------  ------------  ------------- ------------  -------------
<S>                      <C>           <C>           <C>           <C>           <C>           <C>
Outstanding at
     beginning of year        819,752  $      10.45       890,395  $       10.33      926,085  $       10.32
Granted                     2,263,170          9.79        15,092          10.06            -             - 
Exercised                     (10,640)         7.25       (48,410)          8.33       (8,275)          8.99
Expired or forfeited          (23,160)         9.60       (37,325)         10.12      (27,415)         10.45
                         ------------                ------------                ------------
Outstanding at end of
     year                   3,049,122          9.98       819,752          10.45      890,395          10.33
                         ============                ============                ============
                                                                                                            
Exercisable at end of
     year                   1,261,262  $      10.09       601,115  $       10.53      436,195  $       10.47
                         ============                ============                ============



</TABLE>

11.  STOCKHOLDERS' DEFICIT

          Preferred Stock
          The holders of the Company's Class A $.05 Non-Cumulative
Participating Convertible Preferred Stock (the "CLASS A PREFERRED STOCK")
are entitled to receive, if and when declared, preferential cash dividends
at the rate of $.05 per share per annum and will participate thereafter on
a share for share basis with the holders of common stock in all cash
dividends, other than cash dividends on the common stock in any fiscal year
to the extent not exceeding $.05 per share.  Stock dividends declared on
the common stock will result in the holders of the Class A Preferred Stock
receiving an identical stock dividend payable in shares of Class A
Preferred Stock.  At the option of the holder, the Class A Preferred Stock
is convertible at any time into shares of common stock at the rate of one
share of common stock for each share of Class A Preferred Stock.  Each
holder of Class A Preferred Stock is generally entitled to ten votes per
share on all matters presented to a vote of the Company's stockholders.

          Stock Option Plans
          In 1994, the Company adopted the MAXXAM 1994 Omnibus Employee
Incentive Plan (the "1994 OMNIBUS PLAN").  Up to 1,000,000 shares of common
stock and 1,000,000 shares of Class A Preferred Stock were reserved for
awards or for payment of rights granted under the 1994 Omnibus Plan of
which 784,600 and 910,000 shares, respectively, were available to be
awarded at December 31, 1998.  The 1994 Omnibus Plan replaced the Company's
1984 Phantom Share Plan (the "1984 PLAN") which expired in June 1994,
although previous grants thereunder remain outstanding.  The options (or
rights, as applicable) granted in 1996, 1997 and 1998 vest at the rate of
20% per year commencing one year from the date of grant.  The Company paid
$1.2 million and $1.6 million in respect of awards issued pursuant to the
1984 Plan for the years ended December 31, 1998 and 1997, respectively. 
Amounts paid in respect of awards issued pursuant to the 1984 Plan for the
year ended December 31, 1996 were not significant.  The following table
summarizes the options or rights outstanding and exercisable relating to
the 1984 Plan and the 1994 Omnibus Plan.  The prices shown are the weighted
average price per share for the respective number of underlying shares.

<TABLE>
<CAPTION>

                                       1998                        1997                        1996
                           --------------------------- --------------------------- ---------------------------
                               SHARES        PRICE         SHARES        PRICE         SHARES        PRICE
                           ------------  ------------- ------------  ------------- ------------  -------------
<S>                        <C>           <C>           <C>           <C>           <C>           <C>
Outstanding at beginning
     of year                    296,800  $       38.47      250,100  $       34.75      207,900  $       31.59
Granted                          79,500          48.93       98,500          41.71       45,000          48.84
Exercised                       (53,200)         33.09      (50,300)         26.11       (1,800)         15.31
Expired or forfeited            (21,100)         42.03       (1,500)         45.15       (1,000)         45.15
                           ------------                ------------                ------------
Outstanding at end of year      302,000          41.93      296,800          38.47      250,100          34.75
                           ============                ============                ============
                                                                                                              
Exercisable at end of year      107,700  $       36.32      117,200  $       33.53      122,100  $       29.40
                           ============                ============                ============


</TABLE>

          Concurrent with the adoption of the 1994 Omnibus Plan, the
Company adopted the MAXXAM 1994 Non-Employee Director Plan (the "1994
DIRECTOR PLAN").  Up to 35,000 shares of common stock are reserved for
awards under the 1994 Director Plan.  In 1998, 1997 and 1996, options to
purchase 1,800 shares, 1,800 shares and 900 shares of common stock,
respectively, were granted to three non-employee directors.  The weighted
average exercise prices of these options are $60.94, $43.19 and $43.88 per
share, respectively, based on the quoted market price at the date of grant. 
The options vest at the rate of 25% per year commencing one year from the
date of grant.  At December 31, 1998, options for 3,075 shares were
exercisable.

          Shares Reserved for Issuance
          At December 31, 1998, the Company had 2,703,590 common shares and
1,000,000 Class A Preferred shares reserved for future issuances in
connection with various options, convertible securities and other rights as
described in this Note 11.

          Rights
          On November 29, 1989, the Board of Directors of the Company
declared a dividend to its stockholders consisting of (i) one Series A
Preferred Stock Purchase Right (the "SERIES A RIGHT") for each outstanding
share of the Company's Class A Preferred Stock and (ii) one Series B
Preferred Stock Purchase Right (the "SERIES B RIGHT") for each outstanding
share of the Company's common stock.  The Series A Rights and the Series B
Rights are collectively referred to herein as the "Rights."  The Rights are
exercisable only if a person or group of affiliated or associated persons
(an "ACQUIRING PERSON") acquires beneficial ownership, or the right to
acquire beneficial ownership, of 15% or more of the Company's common stock,
or announces a tender offer that would result in beneficial ownership of
15% or more of the outstanding common stock.  Any person or group of
affiliated or associated persons who, as of November 29, 1989, was the
beneficial owner of at least 15% of the outstanding common stock will not
be deemed to be an Acquiring Person unless such person or group acquires
beneficial ownership of additional shares of common stock (subject to
certain exceptions).  Each Series A Right, when exercisable, entitles the
registered holder to purchase from the Company one share of Class A
Preferred Stock at an exercise price of $165.00, subject to adjustment. 
Each Series B Right, when exercisable, entitles the registered holder to
purchase from the Company one one-hundredth of a share of the Company's new
Class B Junior Participating Preferred Stock, with a par value of $.50 per
share (the "JUNIOR PREFERRED STOCK"), at an exercise price of $165.00,
subject to adjustment.

          Under certain circumstances, including if any person becomes an
Acquiring Person other than through certain offers for all outstanding
shares of stock of the Company, or if an Acquiring Person engages in
certain "self-dealing" transactions, each Series A Right would enable its
holder to buy Class A Preferred Stock (or, under certain circumstances,
preferred stock of an acquiring company) having a value equal to two times
the exercise price of the Series A Right, and each Series B Right shall
enable its holder to buy common stock of the Company (or, under certain
circumstances, common stock of an acquiring company) having a value equal
to two times the exercise price of the Series B Right.  Under certain
circumstances, Rights held by an Acquiring Person will be null and void. 
In addition, under certain circumstances, the Board is authorized to
exchange all outstanding and exercisable Rights for stock, in the ratio of
one share of Class A Preferred Stock per Series A Right and one share of
common stock of the Company per Series B Right.  The Rights, which do not
have voting privileges, expire on December 11, 1999, but may be redeemed by
action of the Board prior to that time for $.01 per right, subject to
certain restrictions.

          Voting Control
          Federated Development Inc., a wholly owned subsidiary of
Federated Development Company ("FEDERATED"), and Mr. Charles E. Hurwitz
beneficially own (exclusive of securities acquirable upon exercise of stock
options) an aggregate 99.2% of the Company's Class A Preferred Stock and
37.7% of the Company's common stock (resulting in combined voting control
of approximately 68.9% of the Company).  Mr. Hurwitz is the Chairman of the
Board and Chief Executive Officer of the Company and Chairman and Chief
Executive Officer of Federated.  Federated is wholly owned by Mr. Hurwitz,
members of his immediate family and trusts for the benefit thereof.

12.  COMMITMENTS AND CONTINGENCIES

          Commitments
          Minimum rental commitments under operating leases at December 31,
1998 are as follows: years ending December 31, 1999 - $43.6 million; 2000 -
$39.8 million; 2001 - $35.0 million; 2002 - $30.1 million; 2003 - $28.2
million; thereafter - $119.2 million.  Rental expense for operating leases
was $39.6 million, $35.6 million and $34.2 million for the years ended
December 31, 1998, 1997 and 1996, respectively.  The minimum future rentals
receivable under noncancelable subleases at December 31, 1998 were $73.5
million.

     Aluminum Operations

          Environmental Contingencies
          Kaiser and KACC are subject to a number of environmental laws and
regulations, to fines or penalties assessed for alleged breaches of the
environmental laws and regulations, and to claims and litigation based upon
such laws.  KACC is currently subject to a number of lawsuits under the
Comprehensive Environmental Response, Compensation and Liability Act of
1980 (as amended by the Superfund Amendments Reauthorization Act of 1986,
"CERCLA"), and, along with certain other entities, has been named as a
potentially responsible party for remedial costs at certain third-party
sites listed on the National Priorities List under CERCLA.

          Based on Kaiser's evaluation of these and other environmental
matters, Kaiser has established environmental accruals primarily related to
potential solid waste disposal and soil and groundwater remediation
matters.  The following table presents the changes in such accruals, which
are primarily included in other noncurrent liabilities (in millions):


<TABLE>
<CAPTION>

                                                      YEARS ENDED DECEMBER 31,
                                             ----------------------------------------
                                                  1998          1997          1996
                                             ------------  ------------  ------------
<S>                                          <C>           <C>           <C>
Balance at beginning of year                 $       29.7  $       33.3  $       38.9 
Additional accruals                                  24.5           2.0           3.2 
Less expenditures                                    (3.5)         (5.6)         (8.8)
                                             ------------  ------------  ------------
Balance at end of year                       $       50.7  $       29.7  $       33.3 
                                             ============  ============  ============


</TABLE>

          These environmental accruals represent Kaiser's estimate of costs
reasonably expected to be incurred based on presently enacted laws and
regulations, currently available facts, existing technology and Kaiser's
assessment of the likely remediation action to be taken.  Kaiser expects
that these remediation actions will be taken over the next several years
and estimates that annual expenditures to be charged to these environmental
accruals will be approximately $3.0 million to $8.0 million for the years
1999 through 2003 and an aggregate of approximately $29.0 million
thereafter.

          As additional facts are developed and definitive remediation
plans and necessary regulatory approvals for implementation of remediation
are established or alternative technologies are developed, changes in these
and other factors may result in actual costs exceeding the current
environmental accruals.  As the resolution of these matters is subject to
further regulatory review and approval, no specific assurances can be given
as to when the factors upon which a substantial portion of this estimate is
based can be expected to be resolved.  However, Kaiser is working to
resolve certain of these matters.  Kaiser believes that it has insurance
coverage available to recover certain incurred and future environmental
costs and is actively pursuing claims in this regard.  Through September
30, 1998, no accruals were made for any such insurance recoveries. 
However, during December 1998, KACC received recoveries totaling
approximately $35.0 million from certain of its insurers related to current
and future claims.  Based on Kaiser's analysis, a total of $12.0 million of
such recoveries was allocable to previously accrued (expensed) items and,
therefore, was reflected in earnings during the fourth quarter of 1998. 
The remaining recoveries were offset against increases in the total amount
of environmental reserves.  No assurances can be given that Kaiser will be
successful in other attempts to recover incurred or future costs from other
insurers or that the amount of recoveries received will ultimately be
adequate to cover costs incurred.  While uncertainties are inherent in the
final outcome of these environmental matters, and it is impossible to
determine the actual costs that ultimately may be incurred, management
believes that the resolution of such uncertainties should not have a
material adverse effect on the Company's consolidated financial position,
results of operations or liquidity.

          Asbestos Contingencies
          KACC is a defendant in a number of lawsuits, some of which
involve claims of multiple persons, in which the plaintiffs allege that
certain of their injuries were caused by, among other things, exposure to
asbestos during, and as a result of, their employment or association with
KACC or exposure to products containing asbestos produced or sold by KACC. 
The lawsuits generally relate to products KACC has not manufactured for at
least 20 years. 

          The following table presents the changes in number of such claims
pending for the years ended December 31, 1998, 1997, and 1996.


<TABLE>
<CAPTION>


                                                      YEARS ENDED DECEMBER 31,
                                             ----------------------------------------
                                                  1998          1997          1996
                                             ------------  ------------  ------------
<S>                                          <C>           <C>           <C>
Number of claims at beginning of period            77,400        71,100        59,700 
Claims received                                    22,900        15,600        21,100 
Claims settled or dismissed                       (13,900)       (9,300)       (9,700)
                                             ------------  ------------  ------------
Number of claims at end of period                  86,400        77,400        71,100 
                                             ============  ============  ============



</TABLE>

          The foregoing claims and settlement figures as of December 31,
1998, do not reflect the fact that KACC has reached agreements under which
it will settle approximately 30,000 of the pending asbestos-related claims
over an extended period.

          Based on past experience and reasonably anticipated future
activity, Kaiser has established an accrual for estimated asbestos-related
costs for claims filed and estimated to be filed through 2008.  There are
inherent uncertainties involved in estimating asbestos-related costs and
Kaiser's actual costs could exceed these estimates.  Kaiser's accrual was
calculated based on the current and anticipated number of asbestos-related
claims, the prior timing and amounts of asbestos-related payments, and the
advice of Wharton Levin Ehrmantraut Klein & Nash, P.A. with respect to the
current state of the law related to asbestos claims.  Accordingly, an
estimated asbestos-related cost accrual of $186.2 million, before
consideration of insurance recoveries, is included primarily in other
noncurrent liabilities at December 31, 1998.  While Kaiser does not believe
there is a reasonable basis for estimating such costs beyond 2008 and,
accordingly, no accrual has been recorded for such costs which may be
incurred beyond 2008, there is a reasonable possibility that such costs may
continue beyond 2008, and such costs may be substantial.  Kaiser estimates
that annual future cash payments in connection with such litigation will be
approximately $16.0 million to $28.0 million for each of the years 1999
through 2003, and an aggregate of approximately $77.0 million thereafter.

          Kaiser believes that KACC has insurance coverage available to
recover a substantial portion of its asbestos-related costs.  Although
Kaiser has settled asbestos-related coverage matters with certain of its
insurance carriers, other carriers have not yet agreed to such settlements. 
The timing and amount of future recoveries from these insurance carriers
will depend on the pace of claims review and processing by such carriers
and on the resolution of any disputes regarding coverage under such
policies.  Kaiser believes that substantial recoveries from the insurance
carriers are probable.  Kaiser reached this conclusion after considering
its prior insurance-related recoveries in respect of asbestos-related
claims, its existing insurance policies, and the advisement of Heller
Ehrman White & McAuliffe, P.A. with respect to applicable insurance
coverage law relating to the terms and conditions of those policies. 
Accordingly, an estimated aggregate insurance recovery of $152.5 million,
determined on the same basis as the asbestos-related cost accrual, is
recorded primarily in long-term receivables and other assets at December
31, 1998.

          Kaiser continues to monitor claims activity, the status of
lawsuits (including settlement initiatives), legislative progress, and
costs incurred in order to ascertain whether an adjustment to the existing
accruals should be made to the extent that historical experience may differ
significantly from Kaiser's underlying assumptions. While uncertainties are
inherent in the final outcome of these asbestos matters and it is presently
impossible to determine the actual costs that ultimately may be incurred
and insurance recoveries that will be received, management believes that,
based on the factors discussed in the preceding paragraphs, the resolution
of asbestos-related uncertainties and the incurrence of asbestos-related
costs net of related insurance recoveries should not have a material
adverse effect on the Company's consolidated financial position, results of
operations or liquidity.

          Labor Matters
          In connection with the USWA strike and subsequent "lock-out" by
KACC, certain allegations of unfair labor practices ("ULPS") have been
filed with the National Labor Relations Board by the USWA and its members. 
KACC has responded to all such allegations and believes that they are
without merit.  If the allegations were sustained, KACC could be required
to make locked-out employees whole for back wages from the date of lock-out
in January 1999.  While uncertainties are inherent in the final outcome of
such matters, the Company believes that the resolution of the alleged ULPs
should not result in a material adverse impact on its financial position,
results of operations, or liquidity.

          Forest Products Operations
          Regulatory and environmental matters play a significant role in
the Company's business, which is subject to a variety of California and
federal laws and regulations, as well as the Final HCP and Final SYP
(defined below), dealing with timber harvesting practices, threatened and
endangered species and habitat for such species, and air and water quality. 
While regulatory and environmental concerns have resulted in restrictions
on the geographic scope and timing of the Company's timber operations,
increased operational costs and engendered litigation and other challenges
to the Company's operations, prior to 1998 they have not had a significant
adverse effect on the Company's financial position, results of operations
or liquidity.  However, the Company's 1998 results of operations were
adversely affected by certain regulatory and environmental matters,
including during the second half of 1998, the absence of a sufficient
number of available THPs to enable the Company to conduct its operations at
historic levels.

          On September 28, 1996, Pacific Lumber, including its subsidiaries
and affiliates, and MAXXAM  (the "PACIFIC LUMBER PARTIES") entered into an
agreement (the "HEADWATERS AGREEMENT") with the United States and
California which provided the framework for the acquisition of the
Headwaters Timberlands by the United States and California. Consummation of
the Headwaters Agreement was also conditioned upon, among other things: 
approval of a sustained yield plan establishing long-term sustained yield
("LTSY") harvest levels for Pacific Lumber's timberlands (the "SYP"),
approval of a habitat conservation plan (the "HCP") covering multiple
species (the "MULTI-SPECIES HCP") and issuance of incidental take permits
related to the Multi-Species HCP ("PERMITS").  As further described in Note
17 "Subsequent Events," on March 1, 1999, the Pacific Lumber Parties, the
United States and California consummated the Headwaters Agreement.  In
addition to the transfer of the Headwaters Timberlands by the Pacific
Lumber Parties described in Note 17, Pacific Lumber received an approved
SYP (the "FINAL SYP"), Multi-Species HCP (the "FINAL HCP") and related
Permits.  The Pacific Lumber Parties and California also executed an
agreement regarding the enforcement of the California bill which authorized
state funds for the purchase of the Headwaters Timberlands while imposing
certain restrictions on the remaining timberlands held by the Pacific
Lumber Parties (the "CALIFORNIA AGREEMENT"). 

           The Final SYP complies with certain California Board of Forestry
regulations requiring timber companies to project timber growth and harvest
on their timberlands over a 100-year planning period and establish an LTSY
harvest level.  An SYP must demonstrate that the average annual harvest
over any rolling ten-year period will not exceed the LTSY harvest level and
that a timber company's projected timber inventory is capable of sustaining
the LTSY harvest level in the last decade of the 100-year planning period. 
Under the Final SYP, the Company's projected base average annual harvest
level in the first decade could be approximately 179 million board feet of
softwoods.  The Final SYP is effective for 10 years and may be amended by
Pacific Lumber subject to approval by the CDF.  The Final SYP is subject to
review after five years.  Revised SYPs would be prepared every decade that
address the LTSY harvest level based upon reassessment of changes in the
resource base and other factors.

          Several species, including the northern spotted owl, the marbled
murrelet, the coho salmon and the steelhead trout, have been listed as
endangered or threatened under the ESA and/or the California Endangered
Species Act (the "CESA"). The Final HCP and the Permits allow incidental
"take" of listed species so long as there is no "jeopardy" to the continued
existence of such species.  The Final HCP identifies the measures to be
instituted in order to minimize and mitigate the anticipated level of take
to the greatest extent practicable.  The Final HCP  not only provides for
the Company's compliance with habitat requirements for the northern spotted
owl, the marbled murrelet, the coho salmon and the steelhead trout, it also
provides for issuance of Permits for thirteen additional species that are
or may be listed in the future.  The Final HCP and related Permits have a
term of 50 years, and, among other things, include the following protective
measures: (i) setting aside timberlands as marbled murrelet conservation
areas; (ii) establishing streamside "no-cut" and limited cut buffers as
well as mass wasting areas based on a five-year assessment of each of the
Company's watersheds; (iii) limiting harvesting activities during wet
weather conditions, and (iv) making certain specified improvements to the
Company's roads.   The Final SYP is also subject to the foregoing
provisions. The Company believes that the Final SYP and the Final HCP
should in the long-term expedite the preparation and facilitate approval of
its THPs, although there can be no assurance that the Company will not face
difficulties in the THP submission and approval process as it implements
these agreements.

          Lawsuits are threatened which seek to prevent the Company from
implementing the Final HCP and the Final SYP, and lawsuits are pending
concerning certain of the Company's approved THPs or other operations.  On
January 26, 1998 an action entitled Coho Salmon, et al v. Pacific Lumber,
et al, (the "COHO LAWSUIT") was filed against Pacific Lumber, Scotia
Pacific and Salmon Creek.  This action alleged, among other things,
violations of the ESA and claims that defendants' logging operations in
five watersheds have contributed to the "take" of the coho salmon.  In
March 1999, the Coho lawsuit was dismissed, with prejudice.  Pacific Lumber
has also received notice of additional threatened actions with respect to
the coho salmon.  On August 12, 1998, an action entitled Environmental
Protection Information Center, Inc., Sierra Club v. Pacific Lumber, Scotia
Pacific and Salmon Creek (the "EPIC LAWSUIT") was filed by two
environmental groups against Pacific Lumber, Scotia Pacific and Salmon
Creek under which the environmental groups allege that certain procedural
violations of the federal Endangered Species Act (the "ESA") have resulted
from logging activities on the Company's timberlands and seek to prevent
the defendants from carrying out any harvesting activities until certain
wildlife consultation requirements under the ESA are satisfied in
connection with the development of the Final HCP.  In March 1999, the court
affirmed a preliminary injunction on harvesting on three THPs; however, it
subsequently heard Pacific Lumber's motion to dismiss the case and issued
an order for the plaintiffs to show cause why the lawsuit should not be
dismissed as moot since the consultation requirement appears to have been
concluded.  On or about January 29, 1999, the Company received a notice
from EPIC and the Sierra Club ("EPIC NOTICE LETTER") of their intent to sue
Pacific Lumber and several federal and state agencies under the ESA.  The
letter alleges various violations of the ESA and challenges, among other
things, the validity and legality of the Permits.  The Company is unable to
predict the outcome of either the EPIC lawsuit or the EPIC Notice Letter or
their ultimate impact on the Company's financial condition or results of
operations or the ability to harvest timber on its THPs.  While the Company
expects environmentally focused objections and lawsuits to continue, it
believes that the Final HCP and the Permits should enhance its position in
connection with these challenges. 

          On November 9, 1998, the California Department of Forestry and
Fire Protection ("CDF") notified Pacific Lumber that it had suspended
Pacific Lumber's 1998 timber operator's license ("TOL").  As a result,
Pacific Lumber ceased all operations under its TOL and made the necessary
arrangements for independent contract loggers to be substituted where
necessary (independent contractors historically account for approximately
60% of the harvesting activities on the Company's timberlands).  On
February 26, 1999, the CDF issued Pacific Lumber a conditional TOL for
1999.  The 1999 TOL contains provisions which limit the use of roads during
wet weather conditions and provides for an enhanced compliance program. 
The CDF has also advised Pacific Lumber that if the 1999 TOL is revoked,
issuance of a new conditional license would be unlikely.  The Company does
not believe that the restrictions imposed by the 1999 TOL will have an
adverse effect on Pacific Lumber's or the Company's financial condition or
results of operations.

          OTS Contingency and Related Matters
          On December 26, 1995, the United States Department of Treasury's
Office of Thrift Supervision ("OTS") initiated a formal administrative
proceeding against the Company and others by filing a Notice of Charges
(the "NOTICE").  The Notice alleges, among other things, misconduct by the
Company, Federated Development Company ("FEDERATED"), Mr. Charles Hurwitz
and others (the "RESPONDENTS") with respect to the failure of United
Savings Association of Texas ("USAT"), a wholly owned subsidiary of United
Financial Group Inc. ("UFG").  The Notice claims that the Company was a
savings and loan holding company, that with others it controlled USAT, and
that it was therefore obligated to maintain the net worth of USAT.  The
Notice makes numerous other allegations against the Company and the other
respondents, including, among other things, allegations that through USAT
it was involved in prohibited transactions with Drexel Burnham Lambert Inc. 
The OTS's pre-hearing statement alleged unspecified damages in excess of
$560.0 million from the Company and Federated, civil money penalties and a
removal from, and prohibition against the Company and the other respondents
engaging in, the banking industry.  The hearing on the merits of this
matter commenced on September 22, 1997 and concluded on March 1, 1999.  
Post trial briefing is expected to continue at least through September
1999.  A recommended decision by the Administrative Law Judge is not
expected any sooner than late 1999.  A final agency decision would be
issued by the OTS Director thereafter.  Such decision would then be subject
to appeal by any of the parties to the federal appellate court and, if
adverse to the defendants, subject to bonding.  On February 10, 1999, the
OTS and FDIC settled with the all the respondents except Mr. Hurwitz, the
Company and Federated for $1.0 million and limited cease and desist orders. 

          On August 2, 1995, the Federal Deposit Insurance Corporation
("FDIC") filed a civil action entitled Federal Deposit Insurance
Corporation, as manager of the FSLIC Resolution Fund v. Charles E. Hurwitz
(No. H-95-3956) (the "FDIC ACTION") in the U.S. District Court for the
Southern District of Texas (the "Court").  The original complaint against
Mr. Hurwitz alleged damages in excess of $250.0 million based on the
allegation that Mr. Hurwitz was a controlling shareholder, de facto senior
officer and director of USAT, and was involved in certain decisions which
contributed to the insolvency of USAT.  The original complaint further
alleged, among other things, that Mr. Hurwitz was obligated to ensure that
UFG, Federated and the Company maintained the net worth of USAT.  On
January 15, 1997, the FDIC filed an amended complaint which seeks,
conditioned on the OTS prevailing in its administrative proceeding,
unspecified damages from Mr. Hurwitz relating to amounts the OTS does not
collect from the Company and Federated with respect to their alleged
obligations to maintain USAT's net worth.

          The Company's bylaws provide for indemnification of its officers
and directors to the fullest extent permitted by Delaware law.  The Company
is obligated to advance defense costs to its officers and directors,
subject to the individual's obligation to repay such amount if it is
ultimately determined that the individual was not entitled to
indemnification.  In addition, the Company's indemnity obligation can,
under certain circumstances, include amounts other than defense costs,
including judgments and settlements.  The Company has concluded that it is
unable to determine a reasonable estimate of the loss (or range of loss),
if any, that could result from this contingency.  Accordingly, it is
impossible to assess the ultimate outcome of the foregoing matters or its
potential impact on the Company; however, any adverse outcome of these
matters could have a material adverse effect on the Company's consolidated
financial position, results of operations or liquidity.

          Other Matters
          The Company is involved in various other claims, lawsuits and
other proceedings relating to a wide variety of matters.  While
uncertainties are inherent in the final outcome of such matters and it is
presently impossible to determine the actual costs that ultimately may be
incurred, management believes that the resolution of such uncertainties and
the incurrence of such costs should not have a material adverse effect on
the Company's consolidated financial position, results of operations or
liquidity.
          
13.  DERIVATIVE FINANCIAL INSTRUMENTS AND RELATED HEDGING PROGRAMS

          At December 31, 1998, the net unrealized gain on KACC's position
in aluminum forward sales and option contracts natural gas and fuel oil
forward purchase and option contracts, and forward foreign exchange
contracts, was approximately $17.8 million (based on comparisons to
applicable year-end published market prices).  As KACC's hedging activities
are designed to lock-in a specified price or range of prices, gains or
losses on the derivative contracts utilized in these hedging activities
will be offset by losses or gains, respectively, on the transactions being
hedged.

          Alumina and Aluminum
          Kaiser's earnings are sensitive to changes in the prices of
alumina, primary aluminum and fabricated aluminum products and also depend
to a significant degree upon the volume and mix of all products sold. 
Primary aluminum prices have historically been subject to significant
cyclical price fluctuations.  Alumina prices as well as fabricated aluminum
product prices (which vary considerably among products) are significantly
influenced by changes in the price of primary aluminum but generally lag
behind primary aluminum price changes by up to three months.  Since 1993,
the average Midwest United States transaction price for primary aluminum
has ranged from approximately $.50 to $1.00 per pound.

          From time to time in the ordinary course of business, KACC enters
into hedging transactions to provide price risk management in respect of
the net exposure of earnings resulting from (i) anticipated sales of
alumina, primary aluminum and fabricated aluminum products, less (ii)
expected purchases of certain items, such as aluminum scrap, rolling ingot
and bauxite, whose prices fluctuate with the market price of primary
aluminum.  Forward sales contracts are used by KACC to effectively fix the
price that KACC will receive for its shipments.  KACC also uses option
contracts (i) to establish a minimum price for its product shipments, (ii)
to establish a "collar" or range of price for KACC's anticipated sales
and/or (iii) to permit KACC to realize possible upside price movements.  As
of December 31, 1998, KACC had sold forward, at fixed prices, approximately
24,000 tons of primary aluminum with respect to 1999.  As of December 31,
1998,  KACC had also entered into option contracts that established a price
range for an additional 125,000 and 72,000 tons of primary aluminum with
respect to 1999 through 2000, respectively.   Subsequent to December 31,
1998, KACC has also entered into additional option contracts that
established a price range for an additional 201,000 tons of primary
aluminum with respect to 2000. 

          Additionally, through December 31, 1998, KACC had also entered a
series of transactions with a counterparty that will provide KACC with a
premium over the forward market prices at the date of transaction for 2,000
tons of primary aluminum per month during the period from July 1999 to June
2001.  KACC also contracted with the counterparty to receive a fixed price
(also above the forward market price at the date of the transaction) on
4,000 tons of primary aluminum per month over a three year period
commencing October 2001 unless market prices during certain periods decline
below a stipulated "floor" price, in which case, the fixed price sales
portion of the transactions terminates.  The price at which October 2001
and after  transactions terminate is well below current market prices. 
While Kaiser believes the October 2001 and after transactions are
consistent with its stated hedging objectives, these positions do not
qualify for treatment as a "hedge" under current accounting guidelines. 
Accordingly, these positions will be "marked to market" each period.

          As of December 31, 1998, KACC had sold forward virtually all of
the alumina available to it in excess of its projected internal smelting
requirements for 1999 and 2000 at prices indexed to future prices of
primary aluminum.

          Energy
          KACC is exposed to energy price risk from fluctuating prices for
fuel oil and natural gas consumed in the production process. Accordingly,
KACC from time to time in the ordinary course of business enters into
hedging transactions with major suppliers of energy and energy related
financial instruments.  As of December 31, 1998, KACC had a combination of
fixed price purchase and option contracts for the purchase of approximately
33,000 MMBtu of natural gas per day during 1999.  At December 31, 1998,
KACC also held a combination of fixed price purchase and option contracts
for an average of 246,000 barrels per month of fuel oil and diesel fuel for
1999.

          Foreign Currency
          KACC enters into forward foreign exchange contracts to hedge
material cash commitments to foreign subsidiaries or affiliates.  At
December 31, 1998, KACC had net forward foreign exchange contracts totaling
approximately $141.4 million for the purchase of 210.6 Australian dollars
from January 1999 through December 2000, in respect of its commitments for
1999 and 2000 expenditures denominated in Australian dollars.

14.  SEGMENT INFORMATION

          In the fourth quarter of 1998, the Company adopted Statement of
Financial Accounting Standards No. 131, "Disclosures About Segments of an
Enterprise and Related Information" ("SFAS NO. 131"), which supersedes
Statement of Financial Accounting Standards No. 14 "Financial Reporting for
Segments of a Business Enterprise."  SFAS No. 131 requires financial
information for public reporting purposes to be reported on the basis that
it is used internally by management for evaluating segment performance and
deciding how to allocate resources to segments.

          Reportable Segments
          The Company is a holding company; its operations are organized
and managed as distinct business units which offer different products and
services and are managed separately through the Company's subsidiaries. 
The Company has four reportable segments: aluminum, forest products, real
estate and racing operations.  The aluminum segment is an integrated
aluminum producer which uses portions of its bauxite and alumina to produce
primary aluminum and fabricated aluminum products.  The forest products
segment harvests its timber and produces lumber and logs.  The real estate
segment invests in and develops residential and commercial real estate. 
The racing segment operates a pari-mutual horse racing facility.

          The accounting policies of the segments are the same as those
described in Note 1.  The Company evaluates segment performance based on
profit or loss from operations before income taxes and minority interests. 
The following segment information differs from that presented in prior
years as a result of the adoption of SFAS No. 131 in 1998.  Prior year
information has been restated to conform to the new format.

          The following table presents financial information by reportable
segment (in millions).


<TABLE>
<CAPTION>
                                                                                                               
                                                   FOREST         REAL          RACING                   CONSOLIDATED
                   DECEMBER 31,     ALUMINUM      PRODUCTS       ESTATE       OPERATIONS    CORPORATE       TOTAL
                   ------------   ------------ -------------  ------------  ------------  ------------  ------------
<S>                <C>            <C>          <C>            <C>           <C>           <C>           <C>
Net sales to
     unaffiliated                                                                                                    
     customers             1998   $    2,256.4 $       233.6  $       58.6  $       24.1  $          -  $    2,572.7 
                           1997        2,373.2         287.2          48.7          20.0             -       2,729.1 
                           1996        2,190.5         264.6          67.5          20.7             -       2,543.3 
Operating
     income (loss)         1998           96.5          40.9             -           1.8         (13.6)        125.6 
                           1997          174.0          84.9          (3.4)         (1.6)        (17.5)        236.4 
                           1996          103.7          73.0         (10.1)         (1.9)        (33.4)        131.3 
Investment,
     interest
     and other                                                                                                       
     income                1998            3.5           9.7          15.8            .7           6.6          36.3 
                           1997            3.0          14.8          17.6            .1          14.2          49.7 
                           1996           (2.6)         11.7          31.2           (.4)          1.2          41.1 

Interest
     expense and 
     amortization
     of deferred
     financing
     costs                 1998          110.0          75.3           1.5           3.4          18.3         208.5 
                           1997          110.7          78.7           1.4           3.1          17.7         211.6 
                           1996           93.4          78.4           2.3           3.4           7.0         184.5 

Depreciation,
     depletion and
     amortization          1998           93.2          22.5           3.2           1.0            .5         120.4 
                           1997           96.5          26.1           3.3            .9            .6         127.4 
                           1996          101.7          27.2           4.8            .9            .5         135.1 
Income (loss)
     before income
     taxes and
     minority                                                                            
     interests             1998          (10.0)        (24.7)         14.4          (1.0)        (25.3)        (46.6)
                           1997           66.3          20.9          12.8          (4.4)        (21.1)         74.5 
                           1996            7.6           6.3          18.9          (5.7)        (39.2)        (12.1)
                                                             
Capital
     expenditures          1998           77.6          22.0          22.2           1.0            .1         122.9 
                           1997          128.5          22.9          22.0            .3            .3         174.0 
                           1996          160.3          15.2          10.3            .4            .4         186.6 

Investments in
     and advances
     to unconsol-
     idated                                                                              
     affiliates            1998          128.3             -          18.2             -             -         146.5 
                           1997          148.6             -          10.9             -             -         159.5 

Total assets               1998        2,928.7         682.6         194.6          36.3         233.0       4,075.2 
                           1997        2,950.7         700.0         193.7          34.7         235.1       4,114.2 


</TABLE>

          The amounts in the column entitled Corporate represent corporate
general and administrative expenses, interest and other income, and
interest expense not directly attributable to the reportable segments. 
This column also serves to reconcile the total of the reportable segments'
amounts to totals in the Company's consolidated financial statements.  The
reconciling amounts for total assets for 1998 and 1997 are primarily
related to deferred tax assets.

          Product Sales
          The following table presents segment sales by primary products
(in millions).


<TABLE>
<CAPTION>


                                                      YEARS ENDED DECEMBER 31,
                                             ----------------------------------------
                                                  1998          1997          1996
                                             ------------  ------------  ------------
<S>                                          <C>           <C>           <C>
Aluminum:
     Bauxite and alumina                     $      608.5  $      613.4  $      625.1 
     Primary aluminum                               643.3         817.2         755.7 
     Flat-rolled products                           714.6         743.3         626.0 
     Engineered products                            581.3         581.0         504.4 
     Minority interests and eliminations           (291.3)       (381.7)       (320.7)
                                             ------------  ------------  ------------ 
          Total aluminum sales               $    2,256.4  $    2,373.2  $    2,190.5 

Forest products:
     Lumber                                  $      211.6  $      256.1  $      234.1 
     Other forest products                           22.0          31.1          30.5 
                                             ------------  ------------  ------------ 
          Total forest product sales         $      233.6  $      287.2  $      264.6 

Real estate:
     Real estate and development             $       41.2  $       25.5  $       25.1 
     Resort and other commercial operations          17.4          23.2          42.4 
                                             ------------  ------------  ------------ 
          Total real estate sales            $       58.6  $       48.7  $       67.5 


</TABLE>

          Geographical Information
          The Company's operations are located in many foreign countries,
including Australia, Canada, Ghana, Jamaica, and the United Kingdom. 
Foreign operations in general may be more vulnerable than domestic
operations due to a variety of political and other risks.  Sales and
transfers among geographic areas are made on a basis intended to reflect
the market value of products.  Long-lived assets include property, plant
and equipment-net, timber and timberlands-net, real estate held for
development and sale, and investments in and advances to unconsolidated
affiliates.  Geographical area information relative to operations is
summarized as follows (in millions):


<TABLE>
<CAPTION>


                                                                             OTHER
                    DECEMBER 31,     DOMESTIC     CARIBBEAN     AFRICA      FOREIGN        TOTAL
                   -------------   -----------  -----------  ----------  ------------  ------------
<S>                <C>             <C>          <C>          <C>         <C>           <C>
Net sales to
     unaffiliated
     customers               1998  $   2,014.3  $     237.0  $     89.8  $      231.6  $    2,572.7 
                             1997      2,076.2        204.6       234.2         214.1       2,729.1 
                             1996      1,962.8        201.8       198.3         180.4       2,543.3 

Long-lived assets            1998      1,297.8        289.2        90.2          99.7       1,776.9 
                             1997      1,324.6        283.4       100.4         127.1       1,835.5 


</TABLE>

          Major Customers and Export Sales
          For the years ended December 31, 1998, 1997 and 1996, sales to
any one customer did not exceed 10% of consolidated revenues.  Export sales
were less than 10% of total revenue in 1998, 1997 or 1996.

15.   SUPPLEMENTAL CASH FLOW INFORMATION


<TABLE>
<CAPTION>

                                                      YEARS ENDED DECEMBER 31,
                                             ----------------------------------------
                                                  1998          1997          1996
                                             ------------  ------------  ------------
                                                      (IN MILLIONS OF DOLLARS)
<S>                                          <C>           <C>           <C>
Supplemental information on non-cash                                                  
     investing and financing activities:
     Capital spending accrual excluded from
          investing activities               $          -  $           - $        13.5
     Contribution of property and inventory
          in exchange for joint 
          venture interest                            8.7           10.6             -
     Acquisition of assets subject to other
          liabilities                                  .8            9.4             -
     Reduction of stockholders' deficit due
          to redemption of Kaiser preferred
          stock                                         -           64.8             -
     Borrowing (repayment) of short-term
          debt issued to repurchase 
          treasury stock                            (35.1)          35.1             -

Supplemental disclosure of cash flow
     information:
     Interest paid, net of capitalized
          interest                           $      186.6  $       178.3 $       156.8
     Income taxes paid, net                          16.7           25.4          21.5



</TABLE>


16.  QUARTERLY FINANCIAL INFORMATION (UNAUDITED)

          Summary quarterly financial information for the years ended
December 31, 1998 and 1997 is as follows (in millions):


<TABLE>
<CAPTION>


                                                     THREE MONTHS ENDED
                                  ------------------------------------------------------
                                     MARCH 31      JUNE 30     SEPTEMBER 30  DECEMBER 31
                                  ------------  ------------  ------------- ------------
<S>                               <C>           <C>           <C>           <C>
1998:
     Net sales                    $      664.0  $      699.6  $      628.8  $      580.3 
     Operating income (loss)              51.3          71.0          40.4         (37.1)
     Income (loss) before
          extraordinary item               1.9          12.4          (2.0)        (27.0)
     Extraordinary item, net                 -             -         (42.5)            - 
     Net income (loss)                     1.9          12.4         (44.5)        (27.0)
     Basic earnings per common
          share:
          Income (loss) before
               extraordinary item $        .28  $       1.76  $       (.28) $      (3.86)
          Extraordinary item, net            -             -         (6.07)           -  
                                  ------------  ------------  ------------  ------------
          Net income (loss)                .28          1.76         (6.35) $      (3.86)
                                  ============  ============  ============  ============
     Diluted earnings per common
          and common equivalent
          share:
          Income (loss) before
               extraordinary item $        .25  $       1.57  $       (.28) $      (3.86)
          Extraordinary item                 -             -         (6.07)            - 
                                  ------------  ------------  ------------  ------------ 
          Net income (loss)       $        .25  $       1.57  $      (6.35) $      (3.86)
                                  ============  ============  ============  ============

1997:
     Net sales                    $      631.6  $      689.1  $      726.0  $      682.4 
     Operating income                     49.0          52.7          73.9          60.8 
     Net income                             .7          31.9          18.0          14.6 
     Earnings per share:
          Basic                            .08          3.72          2.17          1.84 
          Diluted                          .07          3.42          1.98          1.67 

</TABLE>


17.  SUBSEQUENT EVENTS
          Headwaters Transactions
          As described in Note 12 above, on September 28, 1996, the Pacific
Lumber Parties entered into the Headwaters Agreement with the United States
and California which provided the framework for the acquisition by the
United States and California of the Headwaters Timberlands.  A substantial
portion of the Headwaters Timberlands contain virgin old growth timber. 
Approximately 4,900 of these acres were owned by Salmon Creek, with the
remaining acreage being owned by the Scotia LLC (Pacific Lumber owning the
timber and related timber harvesting rights on this acreage).  On March 1,
1999, the Pacific Lumber Parties, the United States and California
consummated the Headwaters Agreement.  Salmon Creek received $299.9 million
for its 4,900 acres and, for its 700 acres, Pacific Lumber received the
7,700 acre Elk River Timberlands which are to be contributed to Scotia LLC
on or before August 1999.  Approximately $285.0 million of these proceeds
have been deposited into an escrow account held by an escrow agent and are
to be made available as necessary to support the Timber Notes, and may be
released only under certain circumstances.

          As a result of the disposition of the Headwaters Timberlands, the
Company expects to recognize a pre-tax gain of approximately $240.0
million ($142.0 million, net of tax) in the first quarter of 1999.  This
amount represents the gain attributable to the portion of the Headwaters
Timberlands for which the Company received $299.9 million in cash.  With
respect to the remaining portion for which the Company received the Elk
River Timberlands, no gain has been recognized as this represented an
exchange of substantially similar productive assets.  These timberlands
will be reflected in the Company's financial statements at $6.0 million
which represents the Company's historical cost for the timberlands which
were transferred to the United States.

          Scotia LLC and Pacific Lumber also entered into agreements with
California for the future sale to California of the Owl Creek and Grizzly
Creek groves (the "OWL CREEK AGREEMENT" and the "GRIZZLY CREEK AGREEMENT,"
respectively).  The Owl Creek Agreement provides for Scotia LLC to sell, on
or before June 30, 2002, the Owl Creek grove to California for the lesser
of the appraised fair market value or $79.7 million.  At California's
option, 25% of the payment may be paid upon closing with three equal annual
installments thereafter and without interest.  With respect to the Grizzly
Creek Agreement, California may purchase from Pacific Lumber, on or before
October 31, 2000, a portion of this grove for a purchase price determined
based on fair market value, but not to exceed $19.9 million.  The net
proceeds from the Grizzly Creek grove will be placed into an escrow account
(on the same basis as the net proceeds from the sale of the Headwaters
Timberlands) unless, at the time of receipt of such proceeds, the Escrowed
Funds are no longer held in an escrow account.  California also has a five
year option under the agreement to purchase additional property adjacent to
the Grizzly Creek grove which is within the Grizzly Creek conservation
area.   The sale of the Owl Creek or Grizzly Creek groves will not be
reflected in the Company's financial statements until they have been
concluded.

          Aluminum Operations
          During the first quarter of 1999, two potlines at Kaiser's 90%
owned Valco facility, which were curtailed during most of 1998 (but for
which Valco received compensation from the Volta River Authority in the
form of energy credits), began restarting. Additionally, during the first
quarter of 1999, KACC began restarting two potlines (representing
approximately 50,000 tons of annual capacity) at its Mead, Washington,
smelter, which were originally curtailed in September 1998 as a result of
the USWA strike.  One potline at Kaiser's Tacoma, Washington, smelter has
been prepared for restart but remains curtailed due to Kaiser's
consideration of market-related and other factors.  Kaiser's first quarter
results will be adversely impacted by the effect of the restart costs at
the Valco and Mead facilities and the restart preparations at the Tacoma
facility.

          During February 1999, KACC, through a subsidiary, completed the
acquisition of its joint venture partner's 45% interest in Kaiser La Roche
Hydrate Partners ("KLHP") for a cash purchase price of approximately $10.0
million subject to post-closing adjustments.  As KACC already owned 55% of
KLHP, the results of KLHP were already included in the consolidated
financial statements.

          In January 1999, KACC signed a letter of intent to sell its 50%
interest in AKW, an aluminum wheels joint venture, to its partner.  The
sale, which will result in Kaiser recognizing a  substantial gain, is
expected to be completed on or about March 31, 1999.  However, as the
transaction is subject to the negotiation of a definitive purchase
agreement, no assurances can be given that the transaction will be
completed.  Kaiser's equity in income of AKW was $7.8 million and $4.8
million for the years ended December 31, 1998 and 1997, respectively.


                  REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To MAXXAM Group Inc.:

          We have audited the accompanying consolidated balance sheets of
MAXXAM Group Inc. (a Delaware corporation and a wholly owned subsidiary of
MAXXAM Group Holdings Inc.) and subsidiaries as of December 31, 1998 and
1997, and the related consolidated statements of operations and cash flows
for each of the three years in the period ended December 31, 1998.  These
financial statements are the responsibility of the Company's management. 
Our responsibility is to express an opinion on these financial statements
based on our audits.

          We conducted our audits in accordance with generally accepted
auditing standards.  Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement.  An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements.  An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation.  We believe that our audits
provide a reasonable basis for our opinion.

          In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the financial position of
MAXXAM Group Inc. and subsidiaries as of December 31, 1998 and 1997, and
the results of their operations and their cash flows for each of the three
years in the period ended December 31, 1998, in conformity with generally
accepted accounting principles.



                                        ARTHUR ANDERSEN LLP


San Francisco, California
March 1, 1999


                     MAXXAM GROUP INC. AND SUBSIDIARIES

                         CONSOLIDATED BALANCE SHEET
             (IN MILLIONS OF DOLLARS, EXCEPT SHARE INFORMATION)
<TABLE>
<CAPTION>

                                                          DECEMBER 31,
                                                  --------------------------
                                                       1998          1997
                                                  ------------  ------------
                      ASSETS

<S>                                               <C>           <C>
Current assets:
     Cash and cash equivalents                    $      145.2  $       89.8 
     Marketable securities                                11.7          51.3 
     Receivables:
          Trade                                           10.5          19.3 
          Other                                            2.2           2.2 
     Inventories                                          40.7          58.1 
     Prepaid expenses and other current assets             8.0          13.1 
                                                  ------------  ------------
               Total current assets                      218.3         233.8 
Timber and timberlands, net of accumulated
     depletion of $246.8 and $236.8, respectively        323.6         321.2 
Property, plant and equipment, net of accumulated
     depreciation of $94.7 and $85.4,
     respectively                                        102.6         102.8 
Deferred financing costs, net                             22.8          21.5 
Deferred income taxes                                     80.3          49.6 
Restricted cash                                           16.6          28.4 
Other assets                                               7.2           4.2 
                                                  ------------  ------------
                                                  $      771.4  $      761.5 
                                                  ============  ============
      LIABILITIES AND STOCKHOLDER'S DEFICIT

Current liabilities:
     Accounts payable                             $        3.4  $        3.5 
     Accrued interest                                     28.4          24.3 
     Accrued compensation and related benefits             8.4          12.5 
     Deferred income taxes                                 8.6           9.7 
     Other accrued liabilities                             2.4           2.6 
     Long-term debt, current maturities                    8.3          19.4 
                                                  ------------  ------------ 
               Total current liabilities                  59.5          72.0 
Long-term debt, less current maturities                  860.2         762.9 
Other noncurrent liabilities                              29.6          29.0 
                                                  ------------  ------------ 
               Total liabilities                         949.3         863.9 
                                                  ------------  ------------ 
Contingencies

Stockholder's deficit:
     Common stock, $.08-1/3 par value; 1,000
          shares authorized, 100 shares issued               -             - 
     Additional capital                                   81.3          81.3 
     Accumulated deficit                                (259.2)       (183.7)
                                                  ------------  ------------ 
               Total stockholder's deficit              (177.9)       (102.4)
                                                  ------------  ------------ 
                                                  $      771.4  $      761.5 
                                                  ============  ============ 


</TABLE>


                     MAXXAM GROUP INC. AND SUBSIDIARIES

                    CONSOLIDATED STATEMENT OF OPERATIONS
                          (IN MILLIONS OF DOLLARS)


<TABLE>
<CAPTION>

                                                   YEARS ENDED DECEMBER 31,
                                          ----------------------------------------
                                               1998          1997          1996
                                          ------------  ------------  ------------
<S>                                       <C>           <C>           <C>
Net sales:
     Lumber and logs                      $      213.1  $      261.0  $      243.7 
     Other                                        20.5          26.2          20.9 
                                          ------------  ------------  ------------ 
                                                 233.6         287.2         264.6 
                                          ------------  ------------  ------------ 

Operating expenses:
     Cost of goods sold                          155.3         162.0         148.5 <PAGE>
     Selling, general and administrative
          expenses                                14.9          14.2          15.9 
     Depletion and depreciation                   23.1          27.1          28.2 
                                          ------------  ------------  ------------ 
                                                 193.3         203.3         192.6 
                                          ------------  ------------  ------------ 

Operating income                                  40.3          83.9          72.0 

Other income (expense):
     Investment, interest and other
          income                                   9.2          13.4          10.9 
     Interest expense                            (75.3)        (78.7)        (78.0)
                                          ------------  ------------  ------------ 
Income (loss) before income taxes and
     extraordinary item                          (25.8)         18.6           4.9 
Credit (provision) in lieu of income
     taxes                                         9.1          (6.0)           .7 
                                          ------------  ------------  ------------ 
Income (loss) before extraordinary item          (16.7)         12.6           5.6 
Extraordinary item:
     Loss on early extinguishment of
          debt, net of
          income tax benefit of $22.7            (40.1)            -             - 
                                          ------------  ------------  ------------ 
Net income (loss)                         $      (56.8) $       12.6  $        5.6 
                                          ============  ============  ============ 


</TABLE>


                     MAXXAM GROUP INC. AND SUBSIDIARIES

                    CONSOLIDATED STATEMENT OF CASH FLOWS
                          (IN MILLIONS OF DOLLARS)


<TABLE>
<CAPTION>

                                                   YEARS ENDED DECEMBER 31,
                                          ----------------------------------------
                                               1998          1997          1996
                                          ------------  ------------  ------------
<S>                                       <C>           <C>           <C>
Cash flows from operating activities:
     Net income (loss)                    $      (56.8) $       12.6  $        5.6 
     Adjustments to reconcile net income
          (loss) to net cash provided by 
          operating activities:
          Depletion and depreciation              23.1          27.1          28.2 
          Extraordinary loss on early
               extinguishment of debt,
               net                                40.1 
          Amortization of deferred
               financing costs and
               discounts on long-term
               debt                               10.7          15.9          14.7 
          Net sales (purchases) of
               marketable securities              42.6         (11.3)         10.3 
          Net gains on marketable
               securities                         (2.9)         (8.6)         (5.1)
          Increase (decrease) in cash                                              
               resulting from changes in:
               Receivables                         9.4             -           1.3 
               Inventories, net of
                    depletion                     14.0           9.7           6.0 
               Prepaid expenses and other
                    current assets                (2.7)         (5.3)           .7 
               Accounts payable                   (1.2)          (.1)          (.2)
               Accrued interest                    4.0           (.6)          (.5)
               Accrued and deferred
                    income taxes                  (9.5)          5.6           (.9)
               Other liabilities                  (3.8)          3.3          (4.3)
          Other                                   (1.8)           .1             - 
                                          ------------  ------------  ------------
          Net cash provided by
               operating activities               65.2          48.4          55.8 
                                          ------------  ------------  ------------
Cash flows from investing activities:
     Capital expenditures                        (21.2)        (13.5)        (15.2)
     Net proceeds from sale of assets              6.6            .3            .1 
     Restricted cash withdrawals used to
          acquire timberlands                      8.9             -             - 
                                          ------------  ------------  ------------ 
     Net cash used for
          investing activities                    (5.7)        (13.2)        (15.1)
                                          ------------  ------------  ------------
Cash flows from financing activities:
     Proceeds from issuance of debt              867.2             -             - 
     Premiums for early retirement of
          debt                                   (42.9)            -             - 
     Principal payments on long-term debt       (796.8)        (16.3)        (14.2)
     Dividends paid                              (18.7)         (3.0)         (3.9)
     Restricted cash withdrawals, net              9.5           1.5           1.4 
     Incurrence of deferred financing
          costs                                  (22.4)            -             - 
                                          ------------  ------------  ------------
     Net cash used for
          financing activities                    (4.1)        (17.8)        (16.7)
                                          ------------  ------------  ------------ 

Net increase in cash and cash equivalents         55.4          17.4          24.0 
Cash and cash equivalents at beginning of
     year                                         89.8          72.4          48.4 
                                          ------------  ------------  ------------ 
Cash and cash equivalents at end of year  $      145.2  $       89.8  $       72.4 
                                          ============  ============  ============ 


</TABLE>

                     MAXXAM GROUP INC. AND SUBSIDIARIES

                 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


1.   BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

     BASIS OF PRESENTATION

          The consolidated financial statements include the accounts of
MAXXAM Group Inc. ("MGI") and its subsidiaries, collectively referred to
herein as the "Company."  MGI is a wholly owned subsidiary of MAXXAM Group
Holdings Inc. ("MGHI") which is a wholly owned subsidiary of MAXXAM Inc.
("MAXXAM").  Intercompany balances and transactions have been eliminated. 
Certain reclassifications have been made to prior years' financial
statements to be consistent with the current year's presentation.

          The Company is engaged in forest products operations conducted
through its wholly owned subsidiaries, The Pacific Lumber Company ("PACIFIC
LUMBER") and Britt Lumber Co., Inc. ("BRITT").  Pacific Lumber's principal
wholly owned subsidiaries are Scotia Pacific Company LLC ("SCOTIA LLC") and
Salmon Creek Corporation ("SALMON CREEK").  Pacific Lumber is engaged in
several principal aspects of the lumber industry, including the growing and
harvesting of redwood and Douglas-fir timber, the milling of logs into
lumber and the manufacture of lumber into a variety of finished products.
Britt manufactures redwood and cedar fencing and decking products from
small diameter logs, a substantial portion of which are obtained from
Pacific Lumber.  Housing, construction and remodeling are the principal
markets for the Company's lumber products.  

     USE OF ESTIMATES AND ASSUMPTIONS

          The preparation of financial statements in accordance with
generally accepted accounting principles requires the use of estimates and
assumptions that affect (i) the reported amounts of assets and liabilities,
(ii) the disclosure of contingent assets and liabilities known to exist as
of the date the financial statements are published and (iii) the reported
amount of revenues and expenses recognized during each period presented. 
The Company reviews all significant estimates affecting its consolidated
financial statements on a recurring basis and records the effect of any
necessary adjustments prior to their publication.  Adjustments made with
respect to the use of estimates often relate to improved information not
previously available.  Uncertainties with respect to such estimates and
assumptions are inherent in the preparation of the Company's consolidated
financial statements; accordingly, it is possible that the subsequent
resolution of any one of the contingent matters described in Note 9 could
differ materially from current estimates.  The results of an adverse
resolution of such uncertainties could have a material effect on the
Company's consolidated financial position, results of operations or
liquidity.

     COMPREHENSIVE INCOME

          There are no reconciling differences between the Company's net
income and comprehensive income for the years ended December 31, 1998, 1997
and 1996.

     SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

          Cash Equivalents
          Cash equivalents consist of highly liquid money market
instruments with original maturities of three months or less.

          Marketable Securities
          Marketable securities which consist of corporate bonds and long
and short positions in corporate common stocks are carried at fair value.
The cost of the securities sold is determined using the first-in, first-out
method.  Included in investment, interest and other income for each of the
three years ended December 31, 1998 were: 1998 -net unrealized holding gains
of $5.1 million and net unrealized losses of $2.2 million; 1997 - net
unrealized holding gains of $2.9 million and net realized gains of $5.7
million; and 1996 - net unrealized holding losses of $.9 million and net
realized gains of $5.3 million.

          Inventories
          Inventories are stated at the lower of cost or market.  Cost is
primarily determined using the last-in, first-out ("LIFO") method.

          Timber and Timberlands
          Timber and timberlands are stated at cost, net of accumulated
depletion.  Depletion is computed utilizing the unit-of-production method
based upon estimates of timber values and quantities.

          Property, Plant and Equipment
          Property, plant and equipment, including capitalized interest, is
stated at cost, net of accumulated depreciation.  Depreciation is computed
utilizing the straight-line method at rates based upon the estimated useful
lives of the various classes of assets.  The carrying value of property,
plant and equipment is assessed when events and circumstances indicate that
an impairment is present.  Impairment is determined by measuring
undiscounted future cash flows.  If an impairment is present, the asset is
reported at the lower of carrying value or fair value.

          Deferred Financing Costs
          Costs incurred to obtain financing are deferred and amortized
over the estimated term of the related borrowing.

          Restricted Cash
          At December 31, 1998, cash and cash equivalents includes $28.4
million, which is reserved for debt service payments on the Company's Class
A-1, Class A-2 and Class A-3 Timber Collateralized Notes due 2028 (the
"TIMBER NOTES").  At December 31, 1997, cash and cash equivalents includes 
$17.8 million, which was reserved for debt service payments on the
Company's 7.95% Timber Collateralized Notes due 2015 (the "OLD TIMBER
NOTES").  Long-term restricted cash at December 31, 1998 primarily
represents the amount held in an account by the trustee (the "PREFUNDING
ACCOUNT") under the indenture governing the Timber Notes (the "TIMBER NOTES
INDENTURE") to enable Scotia LLC to acquire timberlands.  Long-term
restricted cash at December 31, 1997 primarily represents the amount held
by the trustee in the liquidity account (the "LIQUIDITY ACCOUNT")
maintained by Scotia Pacific with respect to the Old Timber Notes for the
benefit of holders of the Old Timber Notes under the indenture governing
the Old Timber Notes.

          Also included in cash and cash equivalents is restricted cash of
$46.4 million and $9.7 million of December 31, 1998 and 1997,
respectively, which is held in an interest-bearing account as security for
short position in marketable securities.

          Concentrations of Credit Risk
          The amounts held by the trustee in an account restricted for debt
service payments on the Timber Notes (the "PAYMENT ACCOUNT") and held in
the Prefunding Account for purchase of timberlands are invested primarily
in commercial paper and other short-term investments.  The Company
mitigates its concentration of credit risk with respect to these restricted
cash deposits by purchasing only high grade investments (ratings of A1/P1
short-term or AAA/aaa long-term debt) having maturities of less than three
months.  No more than 10% is invested within the same issue.

          Fair Value of Financial Instruments
          The carrying amounts of cash equivalents and restricted cash
approximate fair value.  Marketable securities are carried at fair value
which is determined based on quoted market prices.  As of December 31, 1998
and 1997, the estimated fair value of long-term debt, including current
maturities, was $807.9 million and $816.0 million, respectively.  The
estimated fair value of long-term debt is determined based on the quoted
market prices for the publicly traded issues and on the current rates
offered for borrowings similar to the other debt.  Some of the Company's
publicly traded debt issues are thinly traded financial instruments;
accordingly, their market prices at any balance sheet date may not be
representative of the prices which would be derived from a more active
market.

2.        INVENTORIES

          Inventories consist of the following (in millions):


<TABLE>
<CAPTION>

                                                      DECEMBER 31,        
                                              --------------------------
                                                   1998          1997
                                              ------------  ------------
<S>                                           <C>           <C>
Lumber                                        $       29.9  $       43.7 
Logs                                                  10.8          14.4 
                                              ------------  ------------
                                              $       40.7  $       58.1 
                                              ============  ============



</TABLE>

3.        PROPERTY, PLANT AND EQUIPMENT

          The major classes of property, plant and equipment are as follows
(dollar amounts in millions):


<TABLE>
<CAPTION>


                                                          DECEMBER 31,
                                                  -------------------------
                                      ESTIMATED
                                    USEFUL LIVES       1998          1997
                                    ------------  ------------  -----------
<S>                                 <C>           <C>           <C>
Logging roads, land and
     improvements                       15 years  $       21.3  $      16.7  
Buildings                               33 years          37.9         36.6  
Machinery and equipment             3 - 15 years         138.1        134.8  
Construction in progress                                     -           .1 
                                                  ------------  ------------
                                                         197.3         188.2 
Less:  accumulated depreciation                          (94.7)        (85.4)
                                                  ------------  ------------
                                                  $      102.6  $      102.8 
                                                  ============  ============


</TABLE>

          Depreciation expense for the years ended December 31, 1998, 1997
and 1996 was $9.2 million, $9.8 million and $9.4 million, respectively.

4.        LONG-TERM DEBT

          Long-term debt consists of the following (in millions):


<TABLE>
<CAPTION>

                                                      DECEMBER 31,
                                              --------------------------
                                                   1998          1997
                                              ------------  ------------
<S>                                           <C>           <C>
7.43% Scotia LLC Timber Collateralized Notes
     due July 20, 2028                        $      867.2  $          - 
7.95% Scotia Pacific Timber Collateralized
     Notes due through July 20, 2015                     -         320.0 
10-1/2% Pacific Lumber Senior Notes due
     March 1, 2003                                       -         235.0 
Pacific Lumber Credit Agreement                          -           9.4 
11-1/4% MGI Senior Secured Notes due August
     1, 2003                                             -         100.0 
12-1/4% MGI Senior Secured Discount Notes
     due August 1, 2003, net of discount                 -         117.3 
Other                                                  1.3            .6 
                                              ------------  ------------
                                                     868.5         782.3 
Less: current maturities                              (8.3)        (19.4)
                                              ------------  ------------
                                              $      860.2  $      762.9 
                                              ============  ============ 


</TABLE>


          Scotia LLC Timber Collateralized Notes due 2028
          On July 20, 1998, Scotia LLC issued $867.2 million aggregate
principal amount of Timber Notes which mature on July 20, 2028 and have an
overall effective interest rate of 7.43% per annum.  Net proceeds from the
offering of the Timber Notes were used primarily to prepay the Old Timber
Notes and to redeem the 10-1/2% Pacific Lumber Senior Notes, the 11-1/4%
MGI Senior Secured Notes and the 12-1/4% MGI Senior Secured Discount Notes
(collectively, the "MGI NOTES") effective August 19, 1998.  The Company
recognized an extraordinary loss of $40.1 million, net of the related
income tax benefit of $22.7 million, in 1998 for the early extinguishment
of the Old Timber Notes, the Pacific Lumber Senior Notes and the MGI Notes. 
Concurrently with the issuance of the Timber Notes, (i) Scotia Pacific was
merged into Scotia LLC, (ii) Pacific Lumber transferred to Scotia LLC
approximately 13,500 acres of timberlands and the timber and timber
harvesting rights with respect to an additional 19,700 acres of
timberlands, and (iii) Scotia LLC transferred to Pacific Lumber the timber
and timber harvesting rights related to approximately 1,400 acres of
timberlands.

          Under the Timber Notes Indenture, the business activities of
Scotia LLC are generally limited to the ownership and operation of its
timber and timberlands.  The Timber Notes are senior secured obligations of
Scotia LLC and are not obligations of, or guaranteed by, Pacific Lumber or
any other person.  The Timber Notes are secured by a lien on (i) Scotia
LLC's timber and timberlands (representing $252.0 million of the Company's
consolidated timber and timberlands balance at December 31, 1998), and (ii)
substantially all of Scotia LLC's other property.  Interest on the Timber
Notes is further secured by a line of credit agreement between Scotia LLC
and a bank pursuant to which Scotia LLC may borrow to pay interest on the
Timber Notes.  The Timber Notes Indenture permits Scotia LLC to have
outstanding up to $75.0 million of non-recourse indebtedness to acquire
additional timberlands and to issue additional timber notes provided
certain conditions are met (including repayment or redemption of the $160.7
million of Class A-1 Timber Notes).

          The Timber Notes are structured to link, to the extent of cash
available, the deemed depletion of Scotia LLC's timber (through the harvest
and sale of logs) to the required amortization of the Timber Notes.  The
required amount of amortization on any Timber Notes payment date is
determined by various mathematical formulas set forth in the Timber Notes
Indenture.  The minimum amount of principal which Scotia LLC must pay (on a
cumulative basis and subject to available cash) through any Timber Notes
payment date in order to avoid an Event of Default is referred to as
Minimum Principal Amortization.  If the Timber Notes were amortized in
accordance with Minimum Principal Amortization, the final installment of
principal would be paid on July 20, 2028.  The minimum amount of principal
which Scotia LLC must pay (on a cumulative basis) through any Timber Notes
payment date in order to avoid payment of prepayment or deficiency premiums
is referred to as Scheduled Amortization.  If all payments of principal are
made in accordance with Scheduled Amortization, the payment date on which
Scotia LLC will pay the final installment of principal is January 20, 2014. 
Such final installment would include a single bullet principal payment of
$463.3 million related to the Class A-3 Timber Notes.

          Principal and interest on the Timber Notes are payable semi-
annually on January 20 and July 20.  The Timber Notes are redeemable at the
option of Scotia LLC at any time.  The redemption price of the Timber Notes
is equal to the sum of the principal amount, accrued interest and a
prepayment premium calculated based upon the yield of like-term Treasury
securities plus 50 basis points.

          As a result of the sale of approximately 5,600 acres of Pacific
Lumber's timberlands consisting of two forest groves commonly referred to
as the Headwater Forest and Elk Head Springs Forest (the "HEADWATERS
TIMBERLANDS") on March 1, 1999, Salmon Creek received proceeds of $299.9
million in cash.  See Note 12 to the Consolidated Financial Statements. 
Salmon Creek has deposited approximately $285.0 million of such proceeds
into an escrow  account (the  "ESCROWED FUNDS"), pursuant to an escrow
agreement (the "ESCROW AGREEMENT") as necessary to support the Timber
Notes.   The net proceeds of the sale of the Grizzly Creek grove will also
be placed in escrow (on the same basis as the net proceeds of the sale of
the Headwaters Timberlands) unless, at the time of receipt of such
proceeds, funds are no longer on deposit under the Escrow Agreement.

          Under the Escrow Agreement, the Escrowed Funds will be released
by the Escrow Agent only in accordance with resolutions duly adopted by
the Board of Managers of Scotia LLC and, unless the resolutions authorize
the payment of funds exclusively to, or to the order of, the Trustee or
the Collateral Agent under the Timber Notes Indenture, only if one or more
of the following conditions are satisfied:  (a) the resolutions authorizing
the release of the Escrowed Funds are adopted by a majority of the Board of
Managers of Scotia LLC (including the affirmative vote of the two
independent managers); (b) a Rating Agency Confirmation (as
defined in the Timber Notes Indenture) has been received that gives effect
to the release or disposition of funds directed by the resolutions; or (c)
Scotia LLC has received an opinion from a nationally recognized investment
banking firm to the effect that, based on the revised harvest schedule and
the other assumptions provided to such firm, the funds that would be
available to Scotia LLC based on such harvest schedule, assumptions and
otherwise under the Timber Notes Indenture after giving effect to the
release or disposition of funds directed by such resolutions would be
adequate (i) to pay Scheduled Amortization (as defined in the Timber Notes
Indenture) on the Class A-1 and Class A-2 Timber Notes and (ii) to amortize
the Class A-3 Timber Notes on a schedule consistent with the original
harvest schedule as of July 9, 1998 (assuming that the Class A-3 Timber
Notes are not refinanced on January 20, 2014).

          Pacific Lumber Credit Agreement
          On December 18, 1998, the Pacific Lumber Credit Agreement was
amended and restated as a new three-year senior secured credit facility
which expires on October 31, 2001.  The new facility allows for borrowings
of up to $60 million, all of which may be used for revolving borrowings,
$20 million of which may be used for standby letters of credit and $30
million of which may be used for timberland acquisitions .  Borrowings
would be secured by all of Pacific Lumber's domestic accounts receivable
and inventory.  Borrowings for timberland acquisitions would also be
secured by the acquired timberlands and, commencing in April 2001, are to
be repaid annually from 50% of Pacific Lumber's cash flow (as defined). 
The remaining excess cash flow is available for dividends.  Upon maturity
of the facility, all outstanding borrowings used for timberland
acquisitions will convert to a term loan repayable over four years.  At
December 31, 1998, Pacific Lumber had $27.5 million of borrowings available
under the agreement, no borrowings were outstanding and letters of credit
outstanding amounted to $14.4 million.

          Maturities
          Scheduled maturities of long-term debt for the five years
following December 31, 1998, using the Scheduled Amortization for the
Timber Notes, are: $8.3 million in 1999, $16.1 million in 2000, $16.5
million in 2001, $17.3 million in 2002, $19.5 million in 2003 and $790.8
million thereafter. 

          Restricted Net Assets of Subsidiaries
          As of December 31, 1998 and 1997, all of the assets of Pacific
Lumber are subject to certain debt instruments which restrict the ability
to transfer assets, make loans and advances and pay dividends to the
Company.  As of December 31, 1998, under the most restrictive covenants
contained in the indentures governing the Timber Notes and the Pacific
Lumber Credit Agreement, Pacific Lumber could pay no dividends.

5.        CREDIT (PROVISION) IN LIEU OF INCOME TAXES

          Income taxes are determined using an asset and liability approach
which requires the recognition of deferred income tax assets and
liabilities for the expected future tax consequences of events that have
been recognized in the Company's financial statements or tax returns. 
Under this method, deferred income tax assets and liabilities are
determined based on the temporary differences between the financial
statement and tax bases of assets and liabilities using enacted tax rates. 
The Company and its subsidiaries are members of MAXXAM's consolidated
return group for federal income tax purposes.

          Pursuant to a tax allocation agreement between MAXXAM, Pacific
Lumber, and Salmon Creek (the "PL TAX ALLOCATION AGREEMENT"), Pacific
Lumber is liable to MAXXAM for the federal consolidated income tax
liability of Pacific Lumber, Scotia LLC and certain other subsidiaries of
Pacific Lumber (but excluding Salmon Creek) (collectively, the "PL
SUBGROUP") computed as if the PL Subgroup was a separate affiliated group
of corporations which was never connected with MAXXAM.  The PL Tax
Allocation Agreement further provides that Salmon Creek is liable to MAXXAM
for its federal income tax liability computed on a separate company basis
as if it was never connected with MAXXAM.  The remaining subsidiaries of
MGI are each liable to MAXXAM for their respective income tax liabilities
computed on a separate company basis as if they were never connected with
MAXXAM, pursuant to their respective tax allocation agreements.

          MGI's tax allocation agreement with MAXXAM (the "TAX ALLOCATION
AGREEMENT") provides that the Company's federal income tax liability is
computed as if MGI files a consolidated tax return with all of its
subsidiaries except Salmon Creek, and that such corporations were never
connected with MAXXAM (the "MGI CONSOLIDATED TAX LIABILITY").  The federal
income tax liability of MGI is the difference between (i) the MGI
Consolidated Tax Liability and (ii) the sum of the separate tax liabilities
for the Company's subsidiaries (computed as discussed above), but excluding
Salmon Creek.  To the extent that the MGI Consolidated Tax Liability is
less than the aggregate amounts in (ii), MAXXAM is obligated to pay the
amount of such difference to MGI.

          The credit (provision) in lieu of income taxes on income (loss)
before income taxes and extraordinary item consists of the following (in
millions):

<TABLE>
<CAPTION>

                                                  YEARS ENDED DECEMBER 31,
                                         ----------------------------------------
                                              1998          1997          1996
                                         ------------  ------------  ------------
<S>                                      <C>           <C>           <C>
Current:
     Federal in lieu of income taxes     $         .1  $        (.4) $        (.1)
     State and local                              (.1)          (.2)            - 
                                         ------------  ------------  ------------ 
                                                    -           (.6)          (.1)
                                         ------------  ------------  ------------ 
Deferred:
     Federal in lieu of income taxes              6.9          (5.5)           .4 
     State and local                              2.2            .1            .4 
                                         ------------  ------------  ------------ 
                                                  9.1          (5.4)           .8 
                                         ------------  ------------  ------------ 
                                         $        9.1  $       (6.0) $         .7 
                                         ============  ============  ============ 


</TABLE>

          A reconciliation between the credit (provision) in lieu of income
taxes and the amount computed by applying the federal statutory income tax
rate to income (loss) before income taxes and extraordinary item is as
follows (in millions):


<TABLE>
<CAPTION>

                                                  YEARS ENDED DECEMBER 31,
                                         ----------------------------------------
                                              1998          1997          1996
                                         ------------  ------------  ------------
<S>                                      <C>           <C>           <C>
Income (loss) before income taxes and
     extraordinary item                  $      (25.8) $       18.6  $        4.9 
                                         ============  ============  ============

Amount of federal income tax credit
     (provision) based
     upon the statutory rate             $        9.0  $       (6.5) $       (1.7)
Revision of prior years' tax estimates
     and other changes in valuation
     allowances                                  (1.1)          1.0           3.4 
Expenses for which no federal tax
     benefit is available                         (.3)          (.2)          (.5)
State and local taxes, net of federal
     tax effect                                   1.4           (.1)          (.6)
Other                                              .1           (.2)           .1 
                                         ------------  ------------  ------------
                                         $        9.1  $       (6.0) $         .7 
                                         ============  ============  ============


</TABLE>

     The revision of prior years' tax estimates and other changes in
valuation allowances as shown in the table above include amounts for the
reversal of reserves which the Company no longer believes are necessary,
other changes in prior years' tax estimates and changes in valuation
allowances with respect to deferred income tax assets.  Generally, the
reversal of reserves relates to the expiration of the relevant statute of
limitations with respect to certain income tax returns or the resolution of
specific income tax matters with the relevant tax authorities.  For the
year ended December 31, 1996, the reversal of reserves which the Company
believes are no longer necessary resulted in a credit to the income tax
provision of $3.2 million.  There were no reversals of reserves for the
years ended December 31, 1998 and 1997.

          The components of the Company's net deferred income tax assets
(liabilities) are as follows (in millions):


<TABLE>
<CAPTION>

                                                         DECEMBER 31,
                                                 --------------------------
                                                      1998          1997
                                                 ------------  ------------
<S>                                              <C>           <C>
Deferred income tax assets:
     Loss and credit carryforwards               $      112.0  $       68.1 
     Timber and timberlands                              29.3          25.8 
     Other                                               10.9          32.3 
     Valuation allowances                               (47.8)        (49.8)
                                                 ------------  ------------ 
          Total deferred income tax assets, net         104.4          76.4 
                                                 ------------  ------------ 
Deferred income tax liabilities:
     Property, plant and equipment                      (15.2)        (17.5)
     Inventories                                         (8.8)        (12.7)
     Other                                               (8.7)         (6.3)
                                                 ------------  ------------ 
          Total deferred income tax liabilities         (32.7)        (36.5)
                                                 ------------  ------------ 
Net deferred income tax assets                   $       71.7  $       39.9 
                                                 ============  ============ 


</TABLE>

          The valuation allowances listed above relate to loss and credit
carryforwards.  As of December 31, 1998, approximately $64.2 million of the
deferred income tax assets listed above relates to the benefit of loss and
credit carryforwards, net of valuation allowances.  The Company evaluated
all appropriate factors to determine the proper valuation allowances for
loss and credit carryforwards.  These factors included any limitations
concerning use of the carryforwards, the year the carryforwards expire
and the levels of taxable income necessary for utilization.  The Company
has concluded that it will more likely than not generate sufficient taxable
income to realize the benefit attributable to the loss and credit
carryforwards for which valuation allowances were not provided. Also
included in net deferred income tax assets as of December 31, 1998 is
$29.3 million which relates to the excess of the tax basis over financial
statement basis with respect to timber and timberlands.  The Company
believes that it is more likely than not that this net deferred income
tax asset will be realized, based primarily upon the estimated value
of its timber and timberlands which is well in excess of its tax basis.

          Included in the net deferred income tax assets listed above are
$64.4 million and $35.6 million at December 31, 1998 and 1997,
respectively, which are recorded pursuant to the tax allocation agreements
with MAXXAM.

          The following table presents the estimated tax attributes for
federal income tax purposes for the Company and its subsidiaries as of
December 31, 1998, under the terms of the respective tax allocation
agreements (dollar amounts in millions).  The utilization of certain of
these attributes is subject to limitations.


<TABLE>
<CAPTION>

                                                                  EXPIRING
                                                                  THROUGH
                                                               -------------
<S>                                              <C>           <C>
Regular Tax Attribute Carryforwards:
     Net operating losses                        $      304.0           2018
Alternative Minimum Tax Attribute                                           
  Carryforwards:
     Net operating losses                        $      272.2           2018


</TABLE>

6.        EMPLOYEE BENEFIT PLANS

          In the fourth quarter of 1998, the Company adopted Statement of
Financial Accounting Standards No. 132, "Employers' Disclosures About
Pension and Other Postretirement Benefits" ("SFAS NO. 132"), which amends
Statements of Financial Accounting Standards Nos. 87, 88 and 106.  SFAS No.
132, among other things, standardizes the disclosure requirements for
pensions and other postretirement benefits and suggests combined formats
for presentation of such disclosures, but has no impact on the computation
of the reported amounts.  Prior year disclosures have been revised to
comply with SFAS No. 132.

          Pension and Other Postretirement Benefit Plans
          Pacific Lumber has a defined benefit plan which covers all
employees of Pacific Lumber.  Under the plan, employees are eligible for
benefits at age 65 or earlier, if certain provisions are met.  The benefits
are determined under a career average formula based on each year of service
with Pacific Lumber and the employee's compensation for that year.  Pacific
Lumber's funding policy is to contribute annually an amount at least equal
to the minimum cash contribution required by The Employee Retirement Income
Security Act of 1974, as amended.

          Pacific Lumber has an unfunded benefit plan for certain
postretirement medical benefits which covers substantially all employees of
Pacific Lumber.  Participants of the plan are eligible for certain health
care benefits upon termination of employment and retirement and
commencement of pension benefits.  Participants make contributions for a
portion of the cost of their health care benefits.  The expected costs of
postretirement medical benefits are accrued over the period the employees
provide services to the date of their full eligibility for such benefits.

          The following tables present the changes, status and assumptions
of Pacific Lumber's pension and other postretirement benefit plans as of
December 31, 1998 ( in millions):


<TABLE>
<CAPTION>

                                            PENSION                   MEDICAL/LIFE
                                            BENEFITS                    BENEFITS
                                  --------------------------- --------------------------- 
                                                        DECEMBER 31,
                                  ------------------------------------------------------
                                       1998          1997          1998          1997
                                  ------------  ------------  ------------  ------------
<S>                               <C>           <C>           <C>           <C>
Change in benefit obligation:
     Benefit obligation at
          beginning of year       $       28.9  $       23.6  $        5.0  $        5.9 
     Service cost                          2.2           1.9            .3            .3 
     Interest cost                         2.2           1.9            .3            .3 
     Plan participants'
          contributions                      -             -            .2            .3 
     Plan amendments                         -            .9             -             - 
     Actuarial (gain) loss                 1.6           1.1           (.5)         (1.1)
     Benefits paid                         (.6)          (.5)          (.3)          (.7)
                                  ------------  ------------  ------------  ------------
          Benefit obligation at
               end of year                34.3          28.9           5.0           5.0 
                                  ------------  ------------  ------------  ------------

Change in plan assets:
     Fair value of plan assets at
          beginning of year               25.9          21.8             -             - 
     Actual return on assets               3.5           4.0             -             - 
     Employer contributions                1.1            .6            .1            .4 
     Plan participants'
          contributions                      -             -            .2            .3 
     Benefits paid                         (.6)          (.5)          (.3)          (.7)
                                  ------------  ------------  ------------  ------------
     Fair value of plan assets at
          end of year                     29.9          25.9             -             - 
                                  ------------  ------------  ------------  ------------

     Benefit obligation in excess
          of plan assets                   4.4           3.0           5.0           5.0 
     Unrecognized actuarial gain           4.4           4.2           1.5           1.0 
     Unrecognized prior service
          costs                            (.9)          (.9)            -             - 
                                  ------------  ------------  ------------  ------------
          Accrued benefit
               liability          $        7.9  $        6.3  $        6.5  $        6.0 
                                  ============  ============  ============  ============



</TABLE>


<TABLE>
<CAPTION>


                                                                                      MEDICAL/LIFE
                                         PENSION BENEFITS                               BENEFITS
                            ------------------------------------------ ---------------------------------------- 
                                                           YEAR ENDED DECEMBER 31,
                            -----------------------------------------------------------------------------------
                                 1998           1997          1996          1998          1997          1996
                            -------------  ------------  ------------  ------------  ------------  ------------
<S>                         <C>            <C>           <C>           <C>           <C>           <C>
Components of net periodic
     benefit costs:
     Service cost           $         2.2  $        1.9  $        1.9  $         .3  $         .3  $         .3 
     Interest cost                    2.2           1.9           1.7            .3            .4            .4 
     Expected return on
          assets                     (1.8)         (1.5)         (1.3)            -             -             - 
     Amortization of prior
          service costs                 .1            -             -             -             -             - 
     Recognized net
          actuarial (gain)
          loss                          -             -             -           (.1)          (.1)            - 
                            -------------  ------------  ------------  ------------  ------------  ------------
          Adjusted net
               periodic
               benefit
               costs        $         2.7  $        2.3  $        2.3  $         .5  $         .6  $         .7 
                            =============  ============  ============  ============  ============  ============



</TABLE>


<TABLE>
<CAPTION>

                                          PENSION BENEFITS                        MEDICAL/LIFE BENEFITS
                             ------------------------------------------ ----------------------------------------- 
                                                            YEAR ENDED DECEMBER 31,
                             -----------------------------------------------------------------------------------
                                  1998           1997          1996          1998          1997          1996
                             -------------  ------------  ------------  ------------  ------------  ------------
<S>                          <C>            <C>           <C>           <C>           <C>           <C>
Weighted-average
assumptions:
     Discount rate                     7.0%          7.3%          7.5%          7.0%          7.3%          7.5%
     Expected return on plan
          assets                       8.0%          8.0%          8.0%             -             -             -
     Rate of compensation
          increase                     5.0%          5.0%          5.0%          5.0%          5.0%          5.0%


</TABLE>

Assumed health care cost trend rates have a significant effect on the
amounts reported for the health care plan.  A one-percentage-point change
in assumed health care cost trend rates as of December 31, 1998 would have
the following effects (in millions):

<TABLE>
<CAPTION>

                                      1-PERCENTAGE-POINT      1-PERCENTAGE-POINT
                                           INCREASE                DECREASE
                                    ----------------------  ---------------------- 
 <S>                                <C>                     <C>

 Effect on total of service and                                       
      interest cost components                    $.1                  $ (.1)

 Effect on the postretirement
      benefit obligations                          .7                    (.6)


</TABLE>

          Employee Savings Plan
          Pacific Lumber's employees are eligible to participate in a
defined contribution savings plan sponsored by MAXXAM.  This plan is
designed to enhance the existing retirement programs of participating
employees.  Employees may elect to defer up to 16% of their base
compensation to the plan.  For those participants who have elected to defer
a portion of their compensation to the plan, Pacific Lumber's matching
contributions are dollar for dollar up to 4% of the participant's
contributions for each pay period.  The cost to the Company of this plan
was $1.4 million, $1.5 million and $1.4 million for the years ended
December 31, 1998, 1997 and 1996, respectively.

          Workers' Compensation Benefits
          Pacific Lumber is self-insured for workers' compensation
benefits, whereas Britt is insured for workers' compensation benefits by an
outside party.  Included in accrued compensation and related benefits and
other noncurrent liabilities are accruals for workers' compensation claims
amounting to $10.8 million at both December 31, 1998 and 1997.  Workers'
compensation expenses amounted to $3.5 million, $4.7 million and $2.6
million for the years ended December 31, 1998, 1997 and 1996, respectively.

7.        RELATED PARTY TRANSACTIONS

          MAXXAM provides the Company and certain of the Company's
subsidiaries with accounting and data processing services.  In addition,
MAXXAM provides the Company with office space and various office personnel,
insurance, legal, operating, financial and certain other services. 
MAXXAM's expenses incurred on behalf of the Company are reimbursed by the
Company through payments consisting of (i) an allocation of the lease
expense for the office space utilized by or on behalf of the Company and
(ii) a reimbursement of actual out-of-pocket expenses incurred by MAXXAM,
including, but not limited to, labor costs of MAXXAM personnel rendering
services to the Company.  Charges by MAXXAM for such services were $3.4
million, $2.2 million and $2.4 million for the years ended December 31,
1998, 1997 and 1996, respectively.  The Company believes that the services
being rendered are on terms not less favorable to the Company than those
which would be obtainable from unaffiliated third parties.

8.        STOCKHOLDER'S DEFICIT

Changes in stockholder's deficit were (in millions):


<TABLE>
<CAPTION>

                                      COMMON
                                      STOCK
                                    ($.08-1/3     ADDITIONAL   ACCUMULATED
                                       PAR)        CAPITAL       DEFICIT        TOTAL    
                                  ------------  ------------  ------------  ------------
<S>                               <C>           <C>           <C>           <C>
Balance, January 1, 1996          $          -  $       81.3  $     (195.0) $     (113.7)
     Net income                              -             -           5.6           5.6 
     Dividends                               -             -          (3.9)         (3.9)
                                  ------------  ------------  ------------  ------------ 
Balance, December 31, 1996                   -          81.3        (193.3)       (112.0)
     Net income                              -             -          12.6          12.6 
     Dividends                               -             -          (3.0)         (3.0)
                                  ------------  ------------  ------------  ------------ 
Balance, December 31, 1997                   -          81.3        (183.7)       (102.4)
     Net loss                                -             -         (56.8)        (56.8)
     Dividends                               -             -         (18.7)        (18.7)
                                  ------------  ------------  ------------  ------------ 
Balance, December 31, 1998        $          -  $       81.3  $     (259.2) $     (177.9)
                                  ============  ============  ============  ============ 


</TABLE>

9.        CONTINGENCIES

          Regulatory and environmental matters play a significant role in
the Company's business, which is subject to a variety of California and
federal laws and regulations, as well as the Final HCP and Final SYP
(defined below), dealing with timber harvesting practices, threatened and
endangered species and habitat for such species, and air and water quality. 
While regulatory and environmental concerns have resulted in restrictions
on the geographic scope and timing of the Company's timber operations,
increased operational costs and engendered litigation and other challenges
to the Company's operations, prior to 1998 they have not had a significant
adverse effect on the Company's financial position, results of operations
or liquidity.  However, the Company's 1998 results of operations were
adversely affected by certain regulatory and environmental matters,
including during the second half of 1998, the absence of a sufficient
number of available THPs to enable the Company to conduct its operations at
historic levels.

          On September 28, 1996, Pacific Lumber, including its subsidiaries
and affiliates, and MAXXAM  (the "PACIFIC LUMBER PARTIES") entered into an
agreement (the "HEADWATERS AGREEMENT") with the United States and
California which provided the framework for the acquisition of the Headwaters
Timberlands by the United States and California.  Consummation of the
Headwaters Agreement was also conditioned upon, among other things: 
approval of a sustained yield plan establishing long-term sustained yield
("LTSY") harvest levels for Pacific Lumber's timberlands (the "SYP"),
approval of a habitat conservation plan (the "HCP") covering multiple
species (the "MULTI-SPECIES HCP") and issuance of incidental take permits
related to the Multi-Species HCP ("PERMITS").  As further described in Note
12 "Subsequent Events," on March 1, 1999, the Pacific Lumber Parties, the
United States and California consummated the Headwaters Agreement.  In
addition to the transfer of the Headwaters Timberlands by the Pacific
Lumber Parties described in Note 12, Pacific Lumber  received an approved
SYP (the "FINAL SYP"), Multi-Species HCP  (the "FINAL HCP") and related
Permits.  The Pacific Lumber Parties and California also executed an
agreement regarding the enforcement of the California bill which authorized
state funds for the purchase of the Headwaters Timberlands while imposing
certain restrictions on the remaining timberlands held by the Pacific
Lumber Parties (the "CALIFORNIA AGREEMENT"). 

           The Final SYP complies with certain California Board of Forestry
regulations requiring timber companies to project timber growth and harvest
on their timberlands over a 100-year planning period and establish an LTSY
harvest level.  An SYP must demonstrate that the average annual harvest
over any rolling ten-year period will not exceed the LTSY harvest level and
that a timber company's projected timber inventory is capable of sustaining
the LTSY harvest level in the last decade of the 100-year planning period. 
Under the Final SYP, the Company's projected base average annual harvest
level in the first decade could be approximately 179 million board feet of
softwoods.  The Final SYP is effective for 10 years, and may be amended by
Pacific Lumber subject to approval by the CDF.  The Final SYP is subject to
review after five years.  Revised SYPs would be prepared every decade that
address the LTSY harvest level based upon reassessment of changes in the
resource base and other factors.

          Several species, including the northern spotted owl, the marbled
murrelet, the coho salmon and the steelhead trout, have been listed as
endangered or threatened under the ESA and/or the California Endangered
Species Act (the "CESA").  The Final HCP and the Permits allow incidental
"take" of listed species so long as there is no "jeopardy" to the continued
existence of such species.  The Final HCP identifies the measures to be
instituted in order to minimize and mitigate the anticipated level of take
to the greatest extent practicable.  The Final HCP not only provides for
the Company's compliance with habitat requirements for the northern spotted
owl, the marbled murrelet, the coho salmon and the steelhead trout, it also
provides for issuance of Permits for thirteen additional species that are
or may be listed in the future.  The Final HCP and related Permits have a
term of 50 years, and, among other things, include the following protective
measures: (i) setting aside timberlands as marbled murrelet conservation
areas; (ii) establishing streamside "no-cut" and limited cut buffers as
well as mass wasting areas based on a five-year assessment of each of the
Company's watersheds; (iii) limiting harvesting activities during wet
weather conditions, and (iv) making certain specified improvements to the
Company's roads.  The Final SYP is also subject to the foregoing
provisions. The Company believes that the Final SYP and the Final HCP
should in the long-term expedite the preparation and facilitate approval of
its THPs, although there can be no assurance that the Company will not face
difficulties in the THP submission and approval process as it implements
these agreements.

          Lawsuits are threatened which seek to prevent the Company from
implementing the Final HCP and the Final SYP, and lawsuits are pending
concerning certain of the Company's approved THPs or other operations.  On
January 26, 1998 an action entitled Coho Salmon, et al v. Pacific Lumber,
et al, (the "COHO LAWSUIT") was filed against Pacific Lumber, Scotia
Pacific and Salmon Creek.  This action alleged, among other things,
violations of the ESA and claims that defendants' logging operations in
five watersheds have contributed to the "take" of the coho salmon.  In
March 1999, the Coho lawsuit was dismissed, with prejudice.  Pacific Lumber
has also received notice of additional threatened actions with respect to
the coho salmon.  On August 12, 1998, an action entitled Environmental
Protection Information Center, Inc., Sierra Club v. Pacific Lumber, Scotia
Pacific and Salmon Creek (the "EPIC LAWSUIT") was filed by two
environmental groups against Pacific Lumber, Scotia Pacific and Salmon
Creek under which the environmental groups allege that certain procedural
violations of the federal Endangered Species Act (the "ESA") have resulted
from logging activities on the Company's timberlands and seek to prevent
the defendants from carrying out any harvesting activities until certain
wildlife consultation requirements under the ESA are satisfied in
connection with the development of the Final HCP.  In March 1999, the court
affirmed a preliminary injunction on harvesting on three THPs; however, it
subsequently heard Pacific Lumber's motion to dismiss the case and issued
an order for the plaintiffs to show cause why the lawsuit should not be
dismissed as moot since the consultation requirement appears to have been
concluded.  On or about January 29, 1999, the Company received a notice
from EPIC and the Sierra Club ("EPIC NOTICE LETTER") of their intent to sue
Pacific Lumber and several federal and state agencies under the ESA.  The
letter alleges various violations of the ESA and challenges, among other
things, the validity and legality of the Permits.  The Company is unable to
predict the outcome of either the EPIC lawsuit or the EPIC Notice Letter or
their ultimate impact on the Company's financial condition or results of
operations or the ability to harvest timber on its THPs.  While the Company
expects environmentally focused objections and lawsuits to continue, it
believes that the Final HCP and the Permits should enhance its position in
connection with these challenges. 

          On November 9, 1998, the California Department of Forestry and
Fire Protection ("CDF") notified Pacific Lumber that it had suspended
Pacific Lumber's 1998 timber operator's license ("TOL").  As a result,
Pacific Lumber ceased all operations under its TOL and made the necessary
arrangements for independent contract loggers to be substituted where
necessary (independent contractors historically account for approximately
60% of the harvesting activities on the Company's timberlands).  On
February 26, 1999, the CDF issued Pacific Lumber a conditional TOL for
1999.  The 1999 TOL contains provisions which limit the use of roads during
wet weather conditions and provides for an enhanced compliance program. 
The CDF has also advised Pacific Lumber that if the 1999 TOL is revoked,
issuance of a new conditional license would be unlikely.  The Company does
not believe that the restrictions imposed by the 1999 TOL will have an
adverse effect on Pacific Lumber's or the Company's financial condition or
results of operations.

10.  SUPPLEMENTAL CASH FLOW AND OTHER INFORMATION

<TABLE>
<CAPTION>

                                                   YEARS ENDED DECEMBER 31,
                                          ----------------------------------------
                                               1998          1997          1996
                                          ------------  ------------  ------------
                                                        (IN MILLIONS)
<S>                                       <C>           <C>           <C>
Supplemental information on non-cash
     investing and financing activities:
     Acquisition of assets subject to
          other liabilities               $         .8  $        9.4  $           -

Supplemental disclosure of cash flow
     information:
     Interest paid, net of capitalized
          interest                        $       62.7  $       63.6  $       63.8 
     Income taxes paid (refunded)                    -            .2          (2.9)
     Tax allocation payments to MAXXAM              .2            .4            .2 


</TABLE>


11.  QUARTERLY FINANCIAL INFORMATION (UNAUDITED)

          Summary quarterly financial information for the years ended
December 31, 1998 and 1997 is as follows (in millions):


<TABLE>
<CAPTION>

                                                   THREE MONTHS ENDED
                                ------------------------------------------------------
                                   MARCH 31      JUNE 30    SEPTEMBER 30   DECEMBER 31
                                ------------  ------------  ------------  ------------
<S>                             <C>           <C>           <C>           <C>
1998:                                                                                  
     Net sales                  $       51.9  $       63.5  $       65.9  $       52.3 
     Operating income                   10.0          14.6          12.7           3.0 
     Income (loss) before
          extraordinary item            (3.1)         (1.8)         (5.3)         (6.5)
     Extraordinary item net                -             -         (40.1)            - 
     Net income (loss)                  (3.1)         (1.8)        (45.4)         (6.5)

1997:                                                                                       
     Net sales                  $       66.8  $       76.8  $       72.8  $       70.8 
     Operating income                   18.7          24.1          22.8          18.3 
     Net income                            -           5.4           4.1           3.1 



</TABLE>

12.  SUBSEQUENT EVENT

          As described in Note 9 above, on September 28, 1996, the Pacific
Lumber Parties entered into the Headwaters Agreement with the United States
and California which provided the framework for the acquisition by the
United States and California of the Headwaters Timberlands.  A substantial
portion of the Headwaters Timberlands contain virgin old growth timber. 
Approximately 4,900 of these acres were owned by Salmon Creek, with the
remaining acreage being owned by Pacific Lumber and Scotia LLC (Pacific
Lumber owning the timber and related timber harvesting rights on Scotia
LLC's acreage).  On March 1, 1999, the Pacific Lumber Parties, the United
States and California consummated the Headwaters Agreement.  Salmon Creek
received $299.9 million for its 4,900 acres and, for its 700 acres, 
Pacific Lumber received the 7,700 acre Elk River Timberlands which are to be
contributed to Scotia LLC on or before August 1999.  Approximately $285.0
million of these proceeds have been deposited into an escrow account held by
an escrow agent and are to be made available as necessary to support the
Timber Notes, and may be released only under certain circumstances.

          As a result of the disposition of the Headwaters Timberlands, the
Company expects to recognize a pre-tax gain of approximately $240.0
million ($142.0 million, net of tax) in the first quarter of 1999.  This
amount represents the gain attributable to the portion of the Headwaters
Timberlands for which the Company received $299.9 million in cash.  With
respect to the remaining portion for which the Company received the Elk
River Timberlands, no gain has been recognized as this represented an
exchange of substantially similar productive assets.  These timberlands
will be reflected in the Company's financial statements at approximately
$6.0 million which represents the Company's historical cost for the
timberlands which were transferred to the United States.

          Scotia LLC and Pacific Lumber also entered into agreements with
California for the future sale to California of the Owl Creek and Grizzly
Creek groves (the "OWL CREEK AGREEMENT" and the "GRIZZLY CREEK AGREEMENT,"
respectively).  The Owl Creek Agreement provides for Scotia LLC to sell, on
or before June 30, 2002, the Owl Creek grove to California for the lesser
of the appraised fair market value or $79.7 million.  At California's
option, 25% of the payment may be paid upon closing with three equal annual
installments thereafter and without interest.  With respect to the Grizzly
Creek Agreement, California may purchase from Pacific Lumber, on or before
October 31, 2000, a portion of this grove for a purchase price determined
based on fair market value, but not to exceed $19.9 million.  The net
proceeds from the Grizzly Creek grove will be placed into an escrow account
(on the same basis as the net proceeds from the sale of the Headwaters
Timberlands) unless, at the time of receipt of such proceeds, the Escrowed
Funds are no longer held in an escrow account.  California also has a five
year option under the agreement to purchase additional property adjacent to
the Grizzly Creek grove which is within the Grizzly Creek conservation
area.  The sale of the Owl Creek or Grizzly Creek groves will not be
reflected in the Company's financial statements until they have been
concluded.



          KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
          R E P O R T  O F  I N D E P E N D E N T  P U B L I C 
          A C C O U N T A N T S 


          To the Stockholders and the Board of Directors of Kaiser Aluminum
          Corporation:

          We have audited the accompanying consolidated balance sheets of
          Kaiser Aluminum Corporation (a Delaware corporation) and
          subsidiaries as of December 31, 1998 and 1997, and the related
          statements of consolidated income (loss) and cash flows for each
          of the three years in the period ended December 31, 1998. These
          financial statements are the responsibility of the Company's
          management. Our responsibility is to express an opinion on these
          financial statements based on our audits.

          We conducted our audits in accordance with generally accepted
          auditing standards. Those standards require that we plan and
          perform the audit to obtain reasonable assurance about whether
          the financial statements are free of material misstatement. An
          audit includes examining, on a test basis, evidence supporting
          the amounts and disclosures in the financial statements. An audit
          also includes assessing the accounting principles used and
          significant estimates made by management, as well as evaluating
          the overall financial statement presentation. We believe that our
          audits provide a reasonable basis for our opinion.

          In our opinion, the financial statements referred to above
          present fairly, in all material respects, the financial position
          of Kaiser Aluminum Corporation and subsidiaries as of December
          31, 1998 and 1997, and the results of their operations and their
          cash flows for each of the three years in the period ended
          December 31, 1998, in conformity with generally accepted
          accounting principles.


                                                  ARTHUR ANDERSEN LLP





          Houston, Texas
          February 28, 1999




          KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
          C O N S O L I D A T E D  B A L A N C E  S H E E T S 

          <TABLE>
          <CAPTION>

                                                                               December 31,
                                                                      ------------------------------
          (In millions of dollars, except share amounts)                        1998            1997
          ------------------------------------------------------------------------------------------
          <S>                                                         <C>             <C>
          ASSETS
          Current assets:
               Cash and cash equivalents                              $        98.3   $        15.8 
               Receivables:
                    Trade, less allowance for doubtful receivables
                         of $6.2 in 1998 and $5.8 in 1997                     170.1           232.9 
                    Other                                                     112.6           107.3 
               Inventories                                                    543.5           568.3 
               Prepaid expenses and other current assets                      105.5           121.3 
                                                                      --------------  --------------

                    Total current assets                                    1,030.0         1,045.6 

          Investments in and advances to unconsolidated affiliates            128.3           148.6 
          Property, plant, and equipment - net                              1,108.7         1,171.8 
          Deferred income taxes                                               377.9           330.6 
          Other assets                                                        346.0           317.3 
                                                                      --------------  --------------
                    Total                                             $     2,990.9   $     3,013.9 
                                                                      ==============  ==============

          LIABILITIES AND STOCKHOLDERS' EQUITY
          Current liabilities:
               Accounts payable                                       $       173.3   $       176.2 
               Accrued interest                                                37.3            37.6 
               Accrued salaries, wages, and related expenses                   73.8            97.9 
               Accrued postretirement medical benefit obligation -
                    current portion                                            48.2            45.3 
               Other accrued liabilities                                      148.3           145.6 
               Payable to affiliates                                           77.1            82.7 
               Long-term debt - current portion                                  .4             8.8 
                                                                      --------------  --------------

                    Total current liabilities                                 558.4           594.1 

          Long-term liabilities                                               532.9           491.9 
          Accrued postretirement medical benefit obligation                   694.3           720.3 
          Long-term debt                                                      962.6           962.9 
          Minority interests                                                  123.5           127.7 
          Commitments and contingencies
          Stockholders' equity:
               Common stock, par value $.01, authorized 100,000,000
                    shares; issued and outstanding, 79,153,543 and
                    78,980,881 in 1998 and 1997                                  .8              .8 
               Additional capital                                             535.4           533.8 
               Accumulated deficit                                           (417.0)         (417.6)
                                                                      --------------  --------------

                    Total stockholders' equity                                119.2           117.0 
                                                                      --------------  --------------


                    Total                                             $     2,990.9   $     3,013.9 
                                                                      ==============  ==============






          </TABLE>




           The accompanying notes to consolidated financial statements are
           an integral part of these statements.


          KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
          S T A T E M E N T S  O F  C O N S O L I D A T E D  I N C O M E 
          ( L O S S ) 


          <TABLE>
          <CAPTION>

                                                                                  Year Ended December 31,
                                                                      ----------------------------------------------
          (In millions of dollars, except share amounts)                        1998            1997            1996
          ----------------------------------------------------------------------------------------------------------
          <S>                                                         <C>             <C>             <C>
          Net sales                                                   $     2,256.4   $     2,373.2   $     2,190.5 
                                                                      --------------  --------------  --------------

          Costs and expenses:
               Cost of products sold                                        1,906.2         1,951.2         1,857.5 
               Depreciation and amortization                                   99.1           102.5           107.6 
               Selling, administrative, research and development,
                    and general                                               115.5           131.8           127.6 
               Impairment of Micromill(TM) assets/restructuring of
                    operations                                                 45.0            19.7            -
                                                                      --------------  --------------  --------------
                    Total costs and expenses                                2,165.8         2,205.2         2,092.7 
                                                                      --------------  --------------  --------------

          Operating income                                                     90.6           168.0            97.8 

          Other income (expense):
               Interest expense                                              (110.0)         (110.7)          (93.4)
               Other - net                                                      3.5             3.0            (2.7)
                                                                      --------------  --------------  --------------

          Income (loss) before income taxes and minority interests            (15.9)           60.3             1.7 

          Benefit (provision) for income taxes                                 16.4            (8.8)            9.3 

          Minority interests                                                     .1            (3.5)           (2.8)
                                                                      --------------  --------------  --------------

          Net income                                                             .6            48.0             8.2 

          Dividends on preferred stock                                         -               (5.5)           (8.4)
                                                                      --------------  --------------  --------------

          Net income (loss) available to common shareholders          $          .6   $        42.5   $         (.2)
                                                                      ==============  ==============  ==============

          Earnings per share:
               Basic                                                  $         .01   $         .57   $         .00 
                                                                      ==============  ==============  ==============

               Diluted                                                $         .01   $         .57   $         .00 
                                                                      ==============  ==============  ==============

          Weighted average shares outstanding (000):
               Basic                                                         79,115          74,221          71,644 
                                                                      ==============  ==============  =============

               Diluted                                                       79,156          74,382          71,644 
                                                                      ==============  ==============  ==============





          </TABLE>

           The accompanying notes to consolidated financial statements are
           an integral part of these statements.

          KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
          S T A T E M E N T S  O F  C O N S O L I D A T E D  C A S H  F L O W S 


          <TABLE>
          <CAPTION>

                                                                                            Year Ended December 31,
                                                                                ----------------------------------------------
          (In millions of dollars)                                                        1998            1997            1996
          --------------------------------------------------------------------------------------------------------------------
          <S>                                                                   <C>             <C>             <C>
          Cash flows from operating activities:
               Net income                                                       $          .6   $        48.0   $         8.2 
               Adjustments to reconcile net income to net cash provided by
                    operating activities:
                         Depreciation and amortization (including deferred
                              financing costs)                                          103.0           108.6           113.2 
                         Impairment of Micromill assets/restructuring of
                              operations                                                 45.0            19.7            -
                         Non-cash benefit for income taxes                               (8.3)          (12.5)           -
                         Equity in (income) loss of unconsolidated affiliates,
                              net of distributions                                         .1             7.8             3.0 
                         Minority interests                                               (.1)            3.5             2.8 
                         Decrease (increase) in receivables                              61.5           (92.1)           51.8 
                         Decrease (increase) in inventories                              24.8            (9.3)          (36.5)
                         Decrease (increase) in prepaid expenses and other
                              assets                                                      2.5             7.8           (39.5)
                         (Decrease) increase in accounts payable and accrued
                              interest                                                   (3.2)          (11.5)            8.8 
                         Decrease in payable to affiliates and accrued
                              liabilities                                               (41.6)          (19.6)          (62.9)
                         Decrease in accrued and deferred income taxes                  (26.2)          (17.4)          (36.5)
                         Other                                                           12.6            12.0             9.5 
                                                                                --------------  --------------  --------------

                              Net cash provided by operating activities                 170.7            45.0            21.9 
                                                                                --------------  --------------  --------------

          Cash flows from investing activities:
               Additions to property, plant, and equipment                              (77.6)         (128.5)         (161.5)
               Other                                                                      3.2            19.9            17.2 
                                                                                --------------  --------------  --------------

                              Net cash used for investing activities                    (74.4)         (108.6)         (144.3)
                                                                                --------------  --------------  --------------

          Cash flows from financing activities:
               Repayments under revolving credit facility, net                           -               -              (13.1)
               Borrowings of long-term debt                                              -               19.0           225.9 
               Repayments of long-term debt                                              (8.9)           (8.8)           (9.0)
               Incurrence of financing costs                                              (.6)            (.9)           (6.2)
               Dividends paid                                                            -               (4.2)          (10.5)
               Capital stock issued                                                        .1              .4            -
               Decrease (increase) in restricted cash, net                                4.3            (5.3)           -
               Redemption of minority interests' preference stock                        (8.7)           (2.1)           (5.3)
                                                                                --------------  --------------  --------------

                              Net cash (used for) provided by financing
                                   activities                                           (13.8)           (1.9)          181.8 
                                                                                --------------  --------------  --------------

          Net increase (decrease) in Cash and cash equivalents during the year           82.5           (65.5)           59.4 
          Cash and cash equivalents at beginning of year                                 15.8            81.3            21.9 
                                                                                --------------  --------------  --------------
          Cash and cash equivalents at end of year                              $        98.3   $        15.8   $        81.3 
                                                                                ==============  ==============  ==============

          Supplemental disclosure of cash flow information:
               Interest paid, net of capitalized interest                       $       106.3   $       102.7   $        84.2 
               Income taxes paid                                                         16.8            24.4            22.7 
               Tax allocation payments to MAXXAM Inc.                                    -               11.8             1.1 

          </TABLE>


           The accompanying notes to consolidated financial statements are
           an integral part of these statements.



KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



(In millions of dollars, except share amounts)

1.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the statements of Kaiser
Aluminum Corporation ("Kaiser" or the "Company") and its majority owned
subsidiaries.  The Company is a subsidiary of MAXXAM Inc. ("MAXXAM") and
conducts its operations through its wholly owned subsidiary, Kaiser
Aluminum & Chemical Corporation ("KACC").  KACC operates in all principal
aspects of the aluminum industry-the mining of bauxite (the major aluminum
bearing ore), the refining of bauxite into alumina  (the intermediate
material), the production of primary aluminum, and the manufacture of
fabricated and semi-fabricated aluminum products.  Kaiser's production
levels of alumina and primary aluminum exceed its internal processing
needs, which allows it to be a major seller of alumina and primary aluminum
to domestic and international third parties (see Note 11).

The preparation of financial statements in accordance with generally
accepted accounting principles requires the use of estimates and
assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities known to exist as of the
date the financial statements are published, and the reported amounts of
revenues and expenses during the reporting period.  Uncertainties, with
respect to such estimates and assumptions, are inherent in the preparation
of the Company's consolidated financial statements; accordingly, it is
possible that the actual results could differ from these estimates and
assumptions, which could have a material effect on the reported amounts of
the Company's consolidated financial position and results of operation.

Investments in 50%-or-less-owned entities are accounted for primarily by
the equity method.  Intercompany balances and transactions are eliminated.

Certain reclassifications of prior-year information were made to conform to
the current presentation.

CASH AND CASH EQUIVALENTS
The Company considers only those short-term, highly liquid investments with
original maturities of 90 days or less to be cash equivalents.

INVENTORIES
Substantially all product inventories are stated at last-in, first-out
("LIFO") cost, not in excess of market value. Replacement cost is not in
excess of LIFO cost. Other inventories, principally operating supplies and
repair and maintenance parts, are stated at the lower of average cost or
market. Inventory costs consist of material, labor, and manufacturing
overhead, including depreciation. Inventories consist of the following:

<TABLE>
<CAPTION>
                                                                     December 31,
                                                            ------------------------------
                                                                      1998            1997
- ------------------------------------------------------------------------------------------
<S>                                                         <C>             <C>
Finished fabricated products                                $        112.4  $        103.9
Primary aluminum and work in process                                 205.6           226.6
Bauxite and alumina                                                  109.5           108.4
Operating supplies and repair and maintenance parts                  116.0           129.4
                                                            --------------  --------------
                                                            $        543.5  $        568.3
                                                            ==============  ==============

</TABLE>

DEPRECIATION
Depreciation is computed principally by the straight-line method at rates
based on the estimated useful lives of the various classes of assets.  The
principal estimated useful lives of land improvements, buildings, and
machinery and equipment are 8 to 25 years, 15 to 45 years, and 10 to 22
years, respectively.

STOCK-BASED COMPENSATION
The Company applies the intrinsic value method to account for a stock-based
compensation plan whereby compensation cost is recognized only to the
extent that the quoted market price of the stock at the measurement date
exceeds the amount an employee must pay to acquire the stock.  No
compensation cost has been recognized for this plan as the stock options
granted in 1998 and 1997 were at the market price.  No stock options were
granted in 1996.  (See Note 7).

OTHER INCOME (EXPENSE)
Other expense in 1998, 1997, and 1996, includes $12.7, $8.8, and $3.1 of
pre-tax charges related principally to establishing additional litigation
reserves for asbestos claims net of estimated aggregate insurance
recoveries pertaining to operations which were discontinued prior to the
acquisition of the Company by MAXXAM in 1988.  Other income in 1998
includes $12.0 attributable to insurance recoveries related to certain
incurred environmental costs.  (See Note 9).

DEFERRED FINANCING COSTS
Costs incurred to obtain debt financing are deferred and amortized over the
estimated term of the related borrowing.  Amortization of $3.9, $6.1, and
$5.6 is included in interest expense for the years ended December 31, 1998,
1997, and 1996, respectively.

FOREIGN CURRENCY
The Company uses the United States dollar as the functional currency for
its foreign operations.

DERIVATIVE FINANCIAL INSTRUMENTS
Hedging transactions using derivative financial instruments are primarily
designed to mitigate KACC's exposure to changes in prices for certain of
the products which KACC sells and consumes and, to a lesser extent, to
mitigate KACC's exposure to changes in foreign currency exchange rates. 
KACC does not utilize derivative financial instruments for trading or other
speculative purposes.  KACC's derivative activities are initiated within
guidelines established by management and approved by KACC's and the
Company's boards of directors.  Hedging transactions are executed centrally
on behalf of all of KACC's business segments to minimize transaction costs,
monitor consolidated net exposures and allow for increased responsiveness
to changes in market factors.

Most of KACC's hedging activities involve the use of option contracts
(which establish a maximum and/or minimum amount to be paid or received)
and forward sales contracts (which effectively fix or lock-in the amount
KACC will pay or receive).  Option contracts typically require the payment
of an up-front premium in return for the right to receive the amount (if
any) by which the price at the settlement date exceeds the strike price. 
Any interim fluctuations in prices prior to the settlement date are
deferred until the settlement date of the underlying hedged transaction, at
which point they are reflected in net sales or cost of sales (as
applicable) together with the related premium cost.  Forward sales
contracts do not require an up-front payment and are settled by the receipt
or payment of the amount by which the price at the settlement date varies
from the contract price.  No accounting recognition is accorded to interim
fluctuations in prices of forward sales contracts.

KACC has established margin accounts and credit limits with certain
counterparties related to open forward sales and option contracts.  When
unrealized gains or losses are in excess of such credit limits, KACC is
entitled to receive advances from the counterparties on open positions or
is required to make margin deposits to counterparties, as the case may be. 
At December 31, 1998, KACC had received $9.9 of margin advances from
counterparties.  At December 31, 1997, KACC had neither received nor made
any margin deposits.  Management considers credit risk related to possible
failure of the counterparties to perform their obligations pursuant to the
derivative contracts to be minimal.

Deferred gains or losses as of December 31, 1998, are included in Prepaid
expenses and other current assets and Other accrued liabilities (See Note
10).

FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company estimates the fair value of its outstanding indebtedness to be
$950.0 and $1,020.0 at December 31, 1998 and 1997, respectively, based on
quoted market prices for KACC's 9-7/8% Senior Notes due 2002 (the "9-7/8%
Notes"), 12-3/4% Senior Subordinated Notes due 2003 (the "12-3/4% Notes"),
and 10-7/8% Senior Notes due 2006 (the "10-7/8% Notes"), and the discounted
future cash flows for all other indebtedness, using the current rate for
debt of similar maturities and terms.  The Company believes that the
carrying amount of other financial instruments is a reasonable estimate of
their fair value, unless otherwise noted.

EARNINGS PER SHARE
Basic - Earnings per share is computed by deducting preferred stock
dividends from net income (loss) in order to determine net income (loss)
available to common shareholders.  This amount is then divided by the
weighted average number of common shares outstanding during the period,
including the weighted average impact of the shares of common stock issued
during the year from the date(s) of issuance.

Diluted - Diluted earnings per share for the years ended December 31, 1998,
and 1997 include the dilutive effect of outstanding stock options (41,000
and 161,000 shares, respectively).  The impact of outstanding stock options
was excluded from the computation for the year ended December 31, 1996, as
its effect would have been antidilutive.  The Company's 8.255% PRIDES,
Convertible Preferred Stock ("PRIDES"), outstanding as of December 31,
1996, have not been treated "as if" converted for purposes of the Diluted
computation in the period ended December 31, 1996, as such treatment would
have been antidilutive.

LABOR RELATED COSTS
The Company is currently operating five of its U.S. facilities with
salaried employees and other workers as a result of the September 30, 1998,
strike by the United Steelworkers of America (USWA) and the subsequent
"lock-out" by the Company in January 1999.  For purposes of computing the
benefit related costs and liabilities to be reflected in the accompanying
consolidated financial statements for the year ended December 31, 1998
(such as pension and other postretirement benefit costs/liabilities), the
Company has based its accruals on the terms of the previously existing
(expired) USWA contract.  Any differences between the amounts accrued and
the amounts ultimately agreed to during the collective bargaining process
will be reflected in future results during the term of any new contract.

All incremental operating costs incurred as a result of the USWA strike and
subsequent lockout are being expensed as incurred. Such costs totaled
approximately $50.0 during 1998 (approximately $40.0 of which were incurred
in the fourth quarter). The Company's fourth quarter 1998 results also
reflect reduced profitability of approximately $10.0 resulting from the
strike-related curtailment of three potlines (representing approximately
70,000 tons* of annual capacity) at the Company's Mead and Tacoma,
Washington, smelters and certain other shipment delays experienced at the
other affected facilities at the outset of the USWA strike.

2.   INVESTMENTS IN AND ADVANCES TO UNCONSOLIDATED AFFILIATES

Summary combined financial information is provided below for unconsolidated
aluminum investments, most of which supply and process raw materials.  The
investees are Queensland Alumina Limited ("QAL") (28.3% owned), Anglesey
Aluminium Limited ("Anglesey") (49.0% owned), and Kaiser Jamaica Bauxite
Company (49.0% owned).  The equity in income (loss) before income taxes of
such operations is treated as a reduction (increase) in cost of products
sold.  At December 31, 1998 and 1997, KACC's net receivable from these
affiliates were not material.  The summary combined financial information
for the years ended December 31, 1998 and 1997, also contains the balances
and results of AKW L.P.("AKW") (50.0% owned), an aluminum wheels joint

- ------------
*  All references to tons in this report refer to metric tons of 2,204.6
pounds.

venture formed with a third party in May 1997.  (See Note 4).  During early
1999, the Company signed a letter of intent to sell its interest in AKW. 
(See Note 12).

SUMMARY OF COMBINED FINANCIAL POSITION

<TABLE>
<CAPTION>
                                                                               December 31,
                                                                      ------------------------------
                                                                                1998            1997
- ----------------------------------------------------------------------------------------------------
<S>                                                                   <C>             <C>
Current assets                                                        $        356.0  $        393.0
Long-term assets (primarily property, plant, and equipment, net)               393.9           395.0
                                                                      --------------  --------------
     Total assets                                                     $        749.9  $        788.0
                                                                      ==============  ==============


Current liabilities                                                   $         92.2  $        117.1
Long-term liabilities (primarily long-term debt)                               396.6           400.8
Stockholders' equity                                                           261.1           270.1
                                                                      --------------  --------------
     Total liabilities and stockholders' equity                       $        749.9  $        788.0
                                                                      ==============  ==============


</TABLE>

SUMMARY OF COMBINED OPERATIONS

<TABLE>
<CAPTION>
                                                              Year Ended December 31,
                                                  ----------------------------------------------
                                                            1998            1997            1996
- ------------------------------------------------------------------------------------------------
<S>                                               <C>             <C>             <C>

Net sales                                         $       659.2   $       644.1   $       660.5 
Costs and expenses                                       (651.7)         (637.8)         (631.5)
Provision for income taxes                                 (2.7)           (8.2)           (8.7)
                                                  --------------  --------------  --------------
Net income (loss)                                 $         4.8   $        (1.9)  $        20.3 
                                                  ==============  ==============  ==============

Company's equity in income                        $         5.4   $         2.9   $         8.8 
                                                  ==============  ==============  ==============

Dividends received                                $         5.5   $        10.7   $        11.8 
                                                  ==============  ==============  ==============

</TABLE>


The Company's equity in income differs from the summary net income (loss)
due to varying percentage ownerships in the entities and equity method
accounting adjustments. At December 31, 1998, KACC's investment in its
unconsolidated affiliates exceeded its equity in their net assets by
approximately $18.2 which amount will be fully amortized over the next two
years.  Amortization of the excess investment totaling $10.0, $11.4, and
$11.6 is included in Depreciation and amortization for the years ended
December 31, 1998, 1997, and 1996, respectively.

The Company and its affiliates have interrelated operations. KACC provides
some of its affiliates with services such as financing, management, and
engineering. Significant activities with affiliates include the acquisition
and processing of bauxite, alumina, and primary aluminum. Purchases from
these affiliates were $235.1, $245.2, and $281.6 in the years ended
December 31, 1998, 1997, and 1996, respectively.

3.   PROPERTY, PLANT, AND EQUIPMENT

The major classes of property, plant, and equipment are as follows:

<TABLE>
<CAPTION>
                                                                December 31,
                                                       ------------------------------

                                                                 1998            1997
- -------------------------------------------------------------------------------------
<S>                                                    <C>             <C>
Land and improvements                                  $       164.1   $       163.9 
Buildings                                                      229.5           228.3 
Machinery and equipment                                      1,549.5         1,529.1 
Construction in progress                                        43.8            51.2 
                                                       --------------  --------------
                                                             1,986.9         1,972.5 
Accumulated depreciation                                      (878.2)         (800.7)
                                                       --------------  --------------
     Property, plant, and equipment, net               $     1,108.7   $     1,171.8 
                                                       ==============  ==============


</TABLE>

During the fourth quarter of 1998, KACC decided to seek a strategic partner
for further development and deployment of its Micromill(TM) technology.  While
technological progress has been good, management concluded that additional
time and investment will be required to achieve commercial success.  Given
the Company's other strategic priorities, the Company believes that
bringing in added commercial and financial resources is the appropriate
course of action for capturing the maximum long-term value.  This change in
strategic course required a different accounting treatment, and the Company
correspondingly recorded a $45.0 impairment charge to reduce the carrying
value of the Micromill assets to approximately $25.0.

During June 1997, Kaiser Bellwood Corporation, a newly formed, wholly owned
subsidiary of KACC, completed the acquisition of Reynolds Metals Company's
Richmond, Virginia, extrusion plant and its existing inventories for a
total purchase price of $41.6, consisting of cash payments of $38.4 and the
assumption of approximately $3.2 of employee related and other liabilities. 
Upon completion of the transaction, Kaiser Bellwood Corporation became a
subsidiary guarantor under the indentures in respect of the 9-7/8% Notes,
10-7/8% Notes, and the 12-3/4% Notes.  (See Note 5.)

4.   RESTRUCTURING OF OPERATIONS

During the second quarter of 1997, the Company recorded a $19.7
restructuring charge to reflect actions taken and plans initiated to
achieve reduced production costs, decreased corporate selling, general and
administrative expenses, and enhanced product mix. The significant
components of the restructuring charge were: (i) a net loss of
approximately $1.4 as a result of the contribution of certain net assets of
KACC's Erie, Pennsylvania, fabrication plant in connection with the
formation of AKW and the subsequent decision to close the remainder of the
Erie plant in order to consolidate its forging operations into two other
facilities; (ii) a charge of $15.6 associated with asset dispositions
regarding product rationalization and geographical optimization; and (iii)
a charge of approximately $2.7 for benefit and other costs associated with
the consolidation or elimination of certain corporate and other staff
functions.

5.   LONG-TERM DEBT

Long-term debt and its maturity schedule are as follows:

<TABLE>
<CAPTION>
                                                                                       2004  December 31,
                                                                                           ----------------
                                                                                        and    1998     1997
                                            1999     2000    2001     2002    2003    After   Total    Total
- ----------------------------------------------- ---------------- ---------------- ---------------- --------
<S>                                     <C>      <C>     <C>      <C>     <C>      <C>     <C>      <C>
Credit Agreement                                                                                -        -
9-7/8% Senior Notes due 2002, net                                 $  224.4                 $  224.4 $  224.2
10-7/8% Senior Notes due 2006, net                                                 $  225.7   225.7    225.8
12-3/4% Senior Subordinated Notes due
     2003                                                                 $  400.0            400.0    400.0
Alpart CARIFA Loans - (fixed and
     variable rates) due 2007, 2008                                                    60.0    60.0     60.0
Other borrowings (fixed and variable
     rates)                             $     .4 $     .3$     .3       .3      .3     51.3    52.9     61.7
                                        -------  ------- -------  ------- -------  ------- -------  -------

Total                                   $     .4 $     .3$     .3 $  224.7$  400.3 $  337.0   963.0    971.7
                                        =======  ======= =======  ======= =======  =======

Less current portion                                                                             .4      8.8
                                                                                           -------  -------

     Long-term debt                                                                        $  962.6 $  962.9
                                                                                           =======  =======


</TABLE>

CREDIT AGREEMENT
In February 1994, the Company and KACC entered into a credit agreement (as
amended, the "Credit Agreement") which provides a $325.0 secured, revolving
line of credit through August 2001.  KACC is able to borrow under the
facility by means of revolving credit advances and letters of credit (up to
$125.0) in an aggregate amount equal to the lesser of $325.0 or a borrowing
base relating to eligible accounts receivable and eligible inventory.  As
of February 28, 1999, $274.1 (of which $74.1 could have been used for
letters of credit) was available to KACC under the Credit Agreement.  The
Credit Agreement is unconditionally guaranteed by the Company and by
certain significant subsidiaries of KACC.  Interest on any outstanding
balances will bear a premium (which varies based on the results of a
financial test) over either a base rate or LIBOR, at KACC's option.

LOAN COVENANTS AND RESTRICTIONS
The Credit Agreement requires KACC to comply with certain financial
covenants and places restrictions on the Company's and KACC's ability to,
among other things, incur debt and liens, make investments, pay dividends,
undertake transactions with affiliates, make capital expenditures, and
enter into unrelated lines of business.  The Credit Agreement is secured
by, among other things, (i) mortgages on KACC's major domestic plants
(excluding KACC's Gramercy alumina plant and Micromill facility); (ii)
subject to certain exceptions, liens on the accounts receivable, inventory,
equipment, domestic patents and trademarks, and substantially all other
personal property of KACC and certain of its subsidiaries; (iii) a pledge
of all the stock of KACC owned by Kaiser; and (iv) pledges of all of the
stock of a number of KACC's wholly owned domestic subsidiaries, pledges of
a portion of the stock of certain foreign subsidiaries, and pledges of a
portion of the stock of certain partially owned foreign affiliates.

The obligations of KACC with respect to its 9-7/8% Notes, its 10-7/8% Notes
and its 12-3/4% Notes are guaranteed, jointly and severally, by certain
subsidiaries of KACC.  The indentures governing the 9-7/8% Notes, the
10-7/8% Notes and the 12-3/4% Notes (collectively, the "Indentures")
restrict, among other things, KACC's ability to incur debt, undertake
transactions with affiliates, and pay dividends.  Further, the Indentures
provide that KACC must offer to purchase the 9-7/8% Notes, the 10-7/8%
Notes and the 12-3/4% Notes, respectively, upon the occurrence of a Change
of Control (as defined therein), and the Credit Agreement provides that the
occurrence of a Change in Control (as defined therein) shall constitute an
Event of Default thereunder.

Under the most restrictive of the covenants in the Credit Agreement,
neither the Company nor KACC currently is permitted to  pay dividends on
its common stock.

In December 1991, Alumina Partners of Jamaica ("Alpart") entered into a
loan agreement with the Caribbean Basin Projects Financing Authority
("CARIFA").  Alpart's obligations under the loan agreement are secured by
two letters of credit aggregating $64.2.  KACC is a party to one of the two
letters of credit in the amount of $41.7 in respect of its ownership
interest in Alpart. Alpart has also agreed to indemnify bondholders of
CARIFA for certain tax payments that could result from events, as defined,
that adversely affect the tax treatment of the interest income on the
bonds.

RESTRICTED NET ASSETS OF SUBSIDIARIES
Certain debt instruments restrict the ability of KACC to transfer assets,
make loans and advances, and pay dividends to the Company.  The restricted
net assets of KACC totaled $124.4 and $121.9 at December 31, 1998 and 1997,
respectively.

CAPITALIZED INTEREST
Interest capitalized in 1998, 1997, and 1996, was $3.0, $6.6, and $4.9,
respectively.

6.   INCOME TAXES

Income (loss) before income taxes and minority interests by geographic area
is as follows:

<TABLE>
<CAPTION>
                                                         Year Ended December 31,
                                             ----------------------------------------------
                                                       1998            1997            1996
- -------------------------------------------------------------------------------------------
<S>                                          <C>             <C>             <C>
Domestic                                     $       (93.6)  $      (112.6)  $       (45.8)
Foreign                                               77.7           172.9            47.5 
                                             --------------  --------------  --------------


     Total                                   $       (15.9)  $        60.3   $         1.7 
                                             ==============  ==============  ==============

</TABLE>

Income taxes are classified as either domestic or foreign, based on whether
payment is made or due to the United States or a foreign country.  Certain
income classified as foreign is also subject to domestic income taxes.

The (provision) benefit for income taxes on income (loss) before income
taxes and minority interests consists of:

<TABLE>
<CAPTION>
                                          Federal         Foreign           State           Total
- -------------------------------------------------------------------------------------------------
<S>                                <C>             <C>             <C>             <C>
1998 Current                       $        (1.8)  $       (16.5)  $         (.2)  $       (18.5)
     Deferred                               44.4           (12.5)            3.0            34.9 
                                   --------------  --------------  --------------  --------------
          Total                    $        42.6   $       (29.0)  $         2.8   $        16.4 
                                   ==============  ==============  ==============  ==============


1997 Current                       $        (2.0)  $       (28.7)  $         (.2)  $       (30.9)
     Deferred                               30.5            (7.0)           (1.4)           22.1 
                                   --------------  --------------  --------------  --------------
          Total                    $        28.5   $       (35.7)  $        (1.6)  $        (8.8)
                                   ==============  ==============  ==============  ==============

1996 Current                       $        (1.6)  $       (21.8)  $         (.1)  $       (23.5)
     Deferred                                8.6             7.6            16.6            32.8 
                                   --------------  --------------  --------------  --------------
          Total                    $         7.0   $       (14.2)  $        16.5   $         9.3 
                                   ==============  ==============  ==============  ==============

</TABLE>

A reconciliation between the benefit (provision) for income taxes and the
amount computed by applying the federal statutory income tax rate to income
before income taxes and minority interests is as follows:

<TABLE>
<CAPTION>
                                                                                  Year Ended December 31,
                                                                      ----------------------------------------------
                                                                                1998            1997            1996
- --------------------------------------------------------------------------------------------------------------------

<S>                                                                   <C>             <C>             <C>
Amount of federal income tax benefit (provision)based on the
     statutory rate                                                   $         5.6   $       (21.1)  $         (.6)
Revision of prior years' tax estimates and other changes in
     valuation allowances                                                       8.3            12.5            10.0 
Percentage depletion                                                            3.2             4.2             3.9 
Foreign taxes, net of federal tax benefit                                      (1.9)           (3.1)           (5.5)
Other                                                                           1.2            (1.3)            1.5 
                                                                      --------------  --------------  --------------
Benefit (provision) for income taxes                                  $        16.4   $        (8.8)  $         9.3 
                                                                      ==============  ==============  ==============


</TABLE>

Included in revision of prior years' tax estimates and other changes in
valuation allowances for 1998, 1997 and 1996 shown above are $8.3, $12.5
and $9.8, respectively, related to the resolution of certain income tax
matters.

The components of the Company's net deferred income tax assets are as
follows:

<TABLE>
<CAPTION>
                                                                December 31,
                                                       ------------------------------
                                                                 1998            1997
- -------------------------------------------------------------------------------------
<S>                                                    <C>             <C>

Deferred income tax assets:
     Postretirement benefits other than pensions       $       279.4   $       288.9 
     Loss and credit carryforwards                              92.0            99.3 
     Other liabilities                                         146.4           169.3 
     Other                                                     132.8           102.0 
     Valuation allowances                                     (107.7)         (113.3)
                                                       --------------  --------------
          Total deferred income tax assets-net                 542.9           546.2 
                                                       --------------  --------------

Deferred income tax liabilities:

     Property, plant, and equipment                           (109.9)         (139.7)
     Other                                                     (54.8)          (54.8)
                                                       --------------  --------------
          Total deferred income tax liabilities               (164.7)         (194.5)
                                                       --------------  --------------

Net deferred income tax assets                         $       378.2   $       351.7 
                                                       ==============  ==============

</TABLE>

The principal component of the Company's net deferred income tax assets is
the tax benefit, net of certain valuation allowances, associated with the
accrued liability for postretirement benefits other than pensions.  The
future tax deductions with respect to the turnaround of this accrual will
occur over a 30-to-40-year period.  If such deductions create or increase a
net operating loss, the Company has the ability to carry forward such loss
for 20 taxable years.  For these reasons, the Company believes that a
long-term view of profitability is appropriate and has concluded that
this net deferred income tax asset will more likely than not be realized.

A substantial portion of the valuation allowances provided by the Company
relates to loss and credit carryforwards.  To determine the proper amount
of valuation allowances with respect to these carryforwards, the Company
evaluated all appropriate factors, including any limitations concerning
their use and the year the carryforwards expire, as well as the levels of
taxable income necessary for utilization.  With regard to future levels of
income, the Company believes, based on the cyclical nature of its business,
its history of operating earnings, and its expectations for future years,
that it will more likely than not generate sufficient taxable income to
realize the benefit attributable to the loss and credit carryforwards for
which valuation allowances were not provided.

As of December 31, 1998 and 1997, $46.2 and $53.7, respectively, of the net
deferred income tax assets listed above are included in the Consolidated
Balance Sheets in the caption entitled Prepaid expenses and other current
assets.  Certain other portions of the deferred income tax liabilities
listed above are included in the Consolidated Balance Sheets in the
captions entitled Other accrued liabilities and Long-term liabilities.

The Company and its domestic subsidiaries file consolidated federal income
tax returns.  During the period from October 28, 1988, through June 30,
1993, the Company and its domestic subsidiaries were included in the
consolidated federal income tax returns of MAXXAM.  During 1997 MAXXAM
reached a settlement with the Internal Revenue Service regarding all
remaining years where the Company and its subsidiaries were included in the
MAXXAM consolidated federal income tax returns.  As a result of this
settlement, KACC paid $11.8 to MAXXAM during 1997, in respect of its
liabilities pursuant to its tax allocation agreement with MAXXAM.  Payments
or refunds for periods prior to July 1, 1993, related to other
jurisdictions could still be required pursuant to the Company's and KACC's
respective tax allocation agreements with MAXXAM.  In accordance with the
Credit Agreement, any such payments to MAXXAM by KACC would require lender
approval, except in certain specific circumstances.  The tax allocation
agreements of the Company and KACC with MAXXAM terminated pursuant to their
terms, effective for taxable periods beginning after June 30, 1993.

At December 31, 1998, the Company had certain tax attributes available to
offset regular federal income tax requirements, subject to certain
limitations, including net operating loss and general business credit
carryforwards of $28.2 and $4.9, respectively, which expire periodically
through 2012 and 2011, respectively, foreign tax credit ("FTC")
carryforwards of $48.4, which expire periodically through 2003, and
alternative minimum tax ("AMT") credit carryforwards of $23.4, which have
an indefinite life.  The Company also has AMT net operating loss and FTC
carryforwards of $6.2 and $87.2, respectively, available, subject to
certain limitations, to offset future alternative minimum taxable income,
which expire periodically through 2011 and 2003, respectively.

7.   EMPLOYEE BENEFIT AND INCENTIVE PLANS

In the fourth quarter of 1998 the Company adopted Statement of Financial
Accounting Standard No. 132, Employers' Disclosures about Pensions and
Other Postretirement Benefits ("SFAS No. 132") which amends FASB Statements
No's. 87, 88, and 106.  SFAS No. 132 revises the disclosure requirements
related to pension and other postretirement benefits, but has no impact on
the computation of the reported amounts.  Prior year disclosures have been
reformatted to comply with SFAS No. 132's guidelines.

PENSION AND OTHER POSTRETIREMENT BENEFIT PLANS
Retirement plans are non-contributory for salaried and hourly employees and
generally provide for benefits based on a formula which considers length of
service and earnings during years of service.  The Company's funding
policies meet or exceed all regulatory requirements.

The Company and its subsidiaries provide postretirement health care and
life insurance benefits to eligible retired employees and their dependents. 
Substantially all employees may become eligible for those benefits if they
reach retirement age while still working for the Company or its
subsidiaries.  The Company has not funded the liability for these benefits
which are expected to be paid out of cash generated by operations.  The
Company reserves the right, subject to applicable collective bargaining
agreements, to amend or terminate these benefits.

Assumptions used to value obligations at year-end and to determine the net
periodic benefit cost in the subsequent year are:

<TABLE>
<CAPTION>
                                                           Pension Benefits                 Medical/Life Benefits
                                                  ---------------------------------- ----------------------------------
                                                        1998        1997        1996       1998        1997        1996
                                                  ---------------------------------- ----------------------------------
<S>                                               <C>         <C>         <C>        <C>         <C>         <C>
Weighted-average assumptions as of December 31,
Discount rate                                          7.00%       7.25%       7.75%      7.00%       7.25%       7.75%
Expected return on plan assets                         9.50%       9.50%       9.50%        -           -           -
Rate of compensation increase                          5.00%       5.00%       5.00%      4.00%       5.00%       5.00%

</TABLE>


In 1998 annual assumed rates of increase in the per capita cost of covered
benefits (i.e. health care cost trend rate) for non-HMO participants are
6.5% and 5.0% for HMO at all ages.  The assumed rate of increase for
non-HMO participants is assumed to decline gradually to 5.0% in 2003 and
remain at that level thereafter.

The following table presents the funded status of the Company's pension and
other postretirement benefit plans as of December 31, 1998 and 1997, and
the corresponding amounts that are included in the Company's Consolidated
Balance Sheets:

<TABLE>
<CAPTION>
                                                                   Pension Benefits              Medical/Life Benefits
                                                            ------------------------------  ------------------------------
                                                                 1998            1997            1998            1997
                                                            --------------  --------------  --------------  --------------
<S>                                                         <C>             <C>             <C>             <C>
     Change in Benefit Obligation:
     Benefit obligation at beginning of year                $       873.0   $       816.2   $       544.5   $       602.8 
     Service cost                                                    14.2            13.4             4.2             6.1 
     Interest cost                                                   59.7            61.6            37.5            44.8 
     Currency exchange rate change                                    (.4)           (6.0)            -               -
     Curtailments, settlements and amendments                        (4.6)            -               4.0             -
     Actuarial (gain) loss                                           15.2            65.5            72.0           (66.3)
     Benefits paid                                                  (84.6)          (77.7)          (45.4)          (42.9)
                                                            --------------  --------------  --------------  --------------
          Benefit obligation at end of year                         872.5           873.0           616.8           544.5 
                                                            --------------  --------------  --------------  --------------

     Change in Plan Assets:
     FMV of plan assets at beginning of year                        756.9           662.0             -               -
     Actual return on assets                                        106.8           131.9             -               -
     Settlements                                                     (5.5)            -               -               -
     Employer contributions                                          28.2            40.7            45.4            42.9 
     Benefits paid                                                  (84.6)          (77.7)          (45.4)          (42.9)
                                                            --------------  --------------  --------------  --------------
     FMV of plan assets at end of year                              801.8           756.9             -               -
                                                            --------------  --------------  --------------  --------------

     Benefit obligations in excess of plan assets                    70.7           116.1            616.8          544.5 
     Unrecognized net actuarial (gain) loss                          23.8             -              55.9           135.0 
     Unrecognized prior service costs                               (18.5)          (22.2)           69.8            86.1 
     Intangible asset and other                                       4.3             5.4             -               -
                                                            --------------  --------------  --------------  --------------
          Accrued benefit liability                         $        80.3   $        99.3   $       742.5   $       765.6 
                                                            ==============  ==============  ==============  ==============


</TABLE>

<TABLE>
<CAPTION>
                                                              Pension Benefits                      Medical/Life Benefits
                                                  ---------------------------------------  ---------------------------------------
                                                      1998         1997          1996          1998         1997         1996
                                                  ------------ ------------  ------------  ------------ ------------ ------------
<S>                                               <C>          <C>           <C>           <C>          <C>          <C>
Components of Net Periodic Benefit Costs:
     Service cost                                 $       14.2 $       13.4  $       12.9  $        4.2 $        6.1 $        3.8 
     Interest cost                                        59.7         61.6          60.0          37.5         44.8         46.9 
     Expected return on assets                           (69.4)       (61.8)        (55.0)         -            -            -
     Amortization of prior service cost                    3.2          3.4           3.5         (12.4)       (12.4)       (12.4)
     Recognized net actuarial (gain) loss                  1.4          2.6           2.0          (7.1)         (.9)        -
                                                  ------------ ------------  ------------  ------------ ------------ ------------
     Net periodic benefit cost                             9.1         19.2          23.4          22.2         37.6         38.3 
     Curtailments, settlements, etc.                       3.2          3.7           2.0          -            -            -
                                                  ------------ ------------  ------------  ------------ ------------ ------------
          Adjusted net periodic benefit costs     $       12.3 $       22.9  $       25.4  $       22.2 $       37.6 $       38.3 
                                                  ============ ============  ============  ============ ============ ============


</TABLE>


The aggregate fair value of plan assets and accumulated benefit obligation
for pension plans with plan assets in excess of accumulated benefit
obligations were $293.0 and $280.7, respectively, as of December 31, 1998,
and $287.8 and $283.4, respectively, as of December 31, 1997.

Assumed health care cost trend rates have a significant effect on the
amounts reported for the health care plan.  A one-percentage-point change
in assumed health care cost trend rates would have the following effects:

<TABLE>
<CAPTION>

                                                                        1% Increase        1% Decrease
                                                                      --------------     --------------
<S>                                                                   <C>                <C>
Increase (decrease) to total of service and interest cost             $         5.8      $        (4.3)
Increase (decrease) to the postretirement benefit obligation          $        64.3      $       (45.4)


</TABLE>

POSTEMPLOYMENT BENEFITS
The Company provides certain benefits to former or inactive employees after
employment but before retirement.

INCENTIVE PLANS
The Company has an unfunded incentive compensation program, which provides
incentive compensation based on performance against annual plans and over
rolling three-year periods.  In addition, the Company has a "nonqualified"
stock option plan and KACC has a defined contribution plan for salaried
employees.  The Company's expense for all of these plans was $7.5, $8.3,
and $(2.1) for the years ended December 31, 1998, 1997, and 1996,
respectively.

Up to 8,000,000 shares of the Company's Common Stock were reserved for
issuance under its stock incentive compensation plans.  At December 31,
1998, 3,634,621 shares of Common Stock remained available for issuance
under those plans.  Stock options granted pursuant to the Company's
nonqualified stock option program are granted at the prevailing market
price, generally vest at a rate of 20 - 33% per year, and have a five or
ten year term.  Information concerning nonqualified stock option plan
activity is shown below.  The weighted average price per share for each
year is shown parenthetically.

<TABLE>
<CAPTION>
                                                                      1998            1997            1996
- ----------------------------------------------------------------------------------------------------------
<S>                                                         <C>             <C>             <C>
Outstanding at beginning of year ($10.45, $10.33, and
     $10.32)                                                      819,752         890,395         926,085 
Granted ($9.79 and $10.06)                                      2,263,170          15,092            -
Exercised ($7.25, $8.33, and $8.99)                               (10,640)        (48,410)         (8,275)
Expired or forfeited ($9.60, $10.12, and $10.45)                  (23,160)        (37,325)        (27,415)
                                                            --------------  --------------  --------------

Outstanding at end of year ($9.98, $10.45, and $10.33)          3,049,122         819,752         890,395 
                                                            ==============  ==============  ==============

Exercisable at end of year ($10.09, $10.53, and $10.47)         1,261,262         601,115         436,195 
                                                            ==============  ==============  ==============

</TABLE>


In accordance with Statement of Financial Accounting Standards No. 123,
Accounting for Stock Based Compensation ("SFAS  No. 123"), the Company is
required to calculate pro forma compensation cost for all stock options
granted subsequent to December 31, 1994.  No stock options were granted
during 1996.  However, as shown in the table above, options were granted in
1998 and 1997 which would be subject to the pro forma calculation
requirements.  For SFAS No. 123 purposes, the fair value of the 1998 and
1997 stock option grants were estimated using a Black-Scholes option
pricing model.  The proforma after-tax effect of the estimated fair value
of the grants would be to reduce net income in 1998 and 1997 by $1.5 and
$.1, respectively.

8.   STOCKHOLDERS' EQUITY, COMPREHENSIVE INCOME AND MINORITY INTERESTS
Changes in stockholders' equity and comprehensive income were:

<TABLE>
<CAPTION>
                                                                                        Additional
                                                                                 Accu-     Minimum
                                         Preferred      Common  Additional     mulated     Pension
                                             Stock       Stock     Capital     Deficit   Liability       Total
- --------------------------------------------------------------------------------------------------------------
<S>                                     <C>         <C>         <C>         <C>         <C>         <C>
BALANCE, DECEMBER 31, 1995              $      .4   $      .7   $   530.3   $  (459.9)  $   (13.8)  $    57.7 
     Net income                                                                   8.2                     8.2 
          Minimum pension liability
               adjustment, net of tax                                                        11.0        11.0 
                                                                                                    ----------
     Comprehensive income                                                                                19.2 
     Common stock issued upon redemption
          and conversion of preferred
          stock                                                        .1                                  .1 
     Dividends on preferred stock                                                (8.4)                   (8.4)
     Incentive plan accretion                                          .7                                  .7 
                                        ----------  ----------  ----------  ----------  ----------  ----------

BALANCE, DECEMBER 31, 1996                     .4          .7       531.1      (460.1)       (2.8)       69.3 

     Net income                                                                  48.0                    48.0 
          Minimum pension liability
               adjustment, net of tax                                                         2.8         2.8 
                                                                                                    ----------
     Comprehensive income                                                                                50.8 
     Common stock issued upon redemption
          and conversion of preferred
          stock                               (.4)         .1         1.7                                 1.4 
     Stock options exercised                                           .4                                  .4 
     Dividends on preferred stock                                                (5.5)                   (5.5)
     Incentive plan accretion                                          .6                                  .6 
                                        ----------  ----------  ----------  ----------  ----------  ----------

BALANCE, DECEMBER 31, 1997                     -           .8       533.8      (417.6)         -        117.0 
     Net income/Comprehensive income                                               .6                      .6 
     Stock options exercised                                           .1                                  .1 
     Incentive plan accretion                                         1.5                                 1.5 
                                        ----------  ----------  ----------  ----------  ----------  ----------

BALANCE, DECEMBER 31, 1998              $      -    $      .8   $   535.4   $  (417.0)  $      -    $   119.2 
                                        ==========  ==========  ==========  ==========  ==========  ==========

</TABLE>

Changes in minority interest were:

<TABLE>
<CAPTION>
                                                   1998                           1997                           1996
                                      ------------------------------ ------------------------------ ------------------------------
<S>                                   <C>             <C>            <C>             <C>            <C>             <C>
                                          Redeemable                     Redeemable                     Redeemable
                                          Preference                     Preference                     Preference
                                               Stock           Other          Stock           Other          Stock           Other
- ----------------------------------------------------------------------------------------------------------------------------------
Beginning of period balance           $        27.7   $       100.0  $        27.5   $        94.2  $        29.7   $        93.0 
Redeemable preference stock
     Accretion                                  1.1                            2.3                            3.1 
     Stock redemption                          (8.7)                          (2.1)                          (5.3)
Minority interests                                              3.4                            5.8                            1.2 
                                      --------------  -------------- --------------  -------------- --------------  --------------
End of period balance                 $        20.1   $       103.4  $        27.7   $       100.0  $        27.5   $        94.2 
                                      ==============  ============== ==============  ============== ==============  ==============


</TABLE>

REDEEMABLE PREFERENCE STOCK
In 1985, KACC issued its Cumulative (1985 Series A) Preference Stock and
its Cumulative (1985 Series B) Preference Stock (together, the "Redeemable
Preference Stock") each of which has a par value of $1 per share and a
liquidation and redemption value of $50 per share plus accrued dividends,
if any.  No additional Redeemable Preference Stock is expected to be
issued.  Holders of the Redeemable Preference Stock are entitled to an
annual cash dividend of $5 per share, or an amount based on a formula tied
to KACC's pre-tax income from aluminum operations, when and as declared by
the Board of Directors.

The carrying values of the Redeemable Preference Stock are increased each
year to recognize accretion between the fair value (at which the Redeemable
Preference Stock was originally issued) and the redemption value.  Changes
in Redeemable Preference Stock are shown below.

<TABLE>
<CAPTION>
                                                            1998            1997            1996
- ------------------------------------------------------------------------------------------------
<S>                                               <C>             <C>             <C>
Shares:
     Beginning of year                                  595,053         634,684         737,363 
     Redeemed                                          (173,478)        (39,631)       (102,679)
                                                  --------------  --------------  --------------

     End of year                                        421,575         595,053         634,684 
                                                  ==============  ==============  ==============

</TABLE>

Redemption fund agreements require KACC to make annual payments by March 31
of the subsequent year based on a formula tied to consolidated net income
until the redemption funds are sufficient to redeem all of the Redeemable
Preference Stock.  On an annual basis, the minimum payment is $4.3 and the
maximum payment is $7.3.  KACC also has certain additional repurchase
requirements which are, among other things, based upon profitability tests.

The Redeemable Preference Stock is entitled to the same voting rights as
KACC common stock and to certain additional voting rights under certain
circumstances, including the right to elect, along with other KACC
preference stockholders, two directors whenever accrued dividends have not
been paid on two annual dividend payment dates or when accrued dividends in
an amount equivalent to six full quarterly dividends are in arrears.  The
Redeemable Preference Stock restricts the ability of KACC to redeem or pay
dividends on its common stock if KACC is in default on any dividends
payable on Redeemable Preference Stock.

PREFERENCE STOCK
KACC has four series of $100 par value Cumulative Convertible Preference
Stock ("$100 Preference Stock") with annual dividend requirements of
between 4-1/8% and 4-3/4%.  KACC has the option to redeem the $100
Preference Stock at par value plus accrued dividends.  KACC does not intend
to issue any additional shares of the $100 Preference Stock.

The $100 Preference Stock can be exchanged for per share cash amounts
between $69 - $80.  KACC records the $100 Preference Stock at their
exchange amounts for financial statement presentation and the Company
includes such amounts in minority interests.  At December 31, 1998 and
1997, outstanding shares of $100  Preference Stock were 19,963 and 20,543,
respectively.

PREFERRED STOCK
PRIDES Convertible - During August 1997, the remaining 8,673,850
outstanding shares of PRIDES were converted into 7,227,848 shares of Common
Stock pursuant to the terms of the PRIDES Certificate of Designations. 
Further, in accordance with the PRIDES Certificate of Designations, no
dividends were paid or payable for the period June 30, 1997, to, but not
including, the date of conversion.  However, in accordance with generally
accepted accounting principles, the $1.3 of accrued dividends attributable
to the period June 30, 1997, to, but not including, the conversion date
were treated as an increase in Additional capital at the date of conversion
and were reflected as a reduction of Net income available to common
shareholders.

PLEDGED SHARES
From time to time MAXXAM or certain of its subsidiaries which own the
Company's Common Stock may use such stock as collateral under various
financing arrangements.  At December 31, 1998, 27,938,250 shares of the
Company's Common Stock beneficially owned by MAXXAM Group Holdings Inc.
("MGHI"), a wholly owned subsidiary of MAXXAM, were pledged as security for
$130.0 principal amount of 12% Senior Secured Notes due 2003 issued in
December 1996 by MGHI.  An additional 7,915,000 shares of the Company's
Common Stock were pledged by MAXXAM under a separate agreement under which
$16.0 had been borrowed by MAXXAM at December 31, 1998.  In addition to the
foregoing, MAXXAM has agreed to secure each $1.0 of borrowings with 400,000
shares of the Company's Common Stock under the terms of another $25.0
credit facility ($2.5 outstanding at December 31, 1998).

9.   COMMITMENTS AND CONTINGENCIES

COMMITMENTS
KACC has a variety of financial commitments, including purchase agreements,
tolling arrangements, forward foreign exchange and forward sales contracts
(see Note 10), letters of credit, and guarantees.  Such purchase agreements
and tolling arrangements include long-term agreements for the purchase and
tolling of bauxite into alumina in Australia by QAL.  These obligations
expire in 2008.  Under the agreements, KACC is unconditionally obligated to
pay its proportional share of debt, operating costs, and certain other
costs of QAL.  KACC's share of the aggregate minimum amount of required
future principal payments at December 31, 1998, is $97.6, of which
approximately $12.0 is due in each of 2000 and 2001 with the balance being
due thereafter.  KACC's share of payments, including operating costs and
certain other expenses under the agreements, has ranged between $100.0 -
$120.0 over the past three years.  KACC also has agreements to supply
alumina to and to purchase aluminum from Anglesey.

Minimum rental commitments under operating leases at December 31, 1998, are
as follows: years ending December 31, 1999 - $35.8; 2000 - $33.4; 2001 -
$31.1; 2002 - $27.3; 2003 - $26.1; thereafter - $114.7.  The future minimum
rentals receivable under noncancelable subleases was $73.5 at December 31,
1998.

Rental expenses were $34.5, $30.4, and $29.6, for the years ended December
31, 1998, 1997, and 1996, respectively.

ENVIRONMENTAL CONTINGENCIES
The Company and KACC are subject to a number of environmental laws, to
fines or penalties assessed for alleged breaches of the environmental laws,
and to claims and litigation based upon such laws.  KACC currently is
subject to a number of lawsuits under the Comprehensive Environmental
Response, Compensation and Liability Act of 1980, as amended by the
Superfund Amendments Reauthorization Act of 1986 ("CERCLA"), and, along
with certain other entities, has been named as a potentially responsible
party for remedial costs at certain third-party sites listed on the
National Priorities List under CERCLA.

Based on the Company's evaluation of these and other environmental matters,
the Company has established environmental accruals, primarily related to
potential solid waste disposal and soil and groundwater remediation
matters.  The following table presents the changes in such accruals, which
are primarily included in Long-term liabilities, for the years ended
December 31, 1998, 1997, and 1996:

<TABLE>
<CAPTION>
                                                                 1998            1997            1996
- -----------------------------------------------------------------------------------------------------
<S>                                                    <C>             <C>             <C>
Balance at beginning of period                         $        29.7   $        33.3   $        38.9 
Additional accruals                                             24.5             2.0             3.2 
Less expenditures                                               (3.5)           (5.6)           (8.8)
                                                       --------------  --------------  --------------

Balance at end of period                               $        50.7   $        29.7   $        33.3 
                                                       ==============  ==============  ==============

</TABLE>

These environmental accruals represent the Company's estimate of costs
reasonably expected to be incurred based on presently enacted laws and
regulations, currently available facts, existing technology, and the
Company's assessment of the likely remediation action to be taken.  The
Company expects that these remediation actions will be taken over the next
several years and estimates that annual expenditures to be charged to these
environmental accruals will be approximately $3.0 to $8.0 for the years
1999 through 2003 and an aggregate of approximately $29.0 thereafter.

As additional facts are developed and definitive remediation plans and
necessary regulatory approvals for implementation of remediation are
established or alternative technologies are developed, changes in these and
other factors may result in actual costs exceeding the current
environmental accruals. As the resolution of these matters is subject to
further regulatory review and approval, no specific assurance can be given
as to when the factors upon which a substantial portion of this estimate is
based can be expected to be resolved.  However, the Company is currently
working to resolve certain of these matters.

The Company believes that it has insurance coverage available to recover
certain incurred and future environmental costs and is actively pursuing
claims in this regard.  Through September 30, 1998, no accruals were made
for any such insurance recoveries.  However, during December 1998, KACC
received recoveries totaling approximately $35.0 from certain of its
insurers related to current and future claims.  Based on the Company's
analysis, a total of $12.0 of such recoveries was allocable to previously
accrued (expensed) items and, therefore, was reflected in earnings during
the fourth quarter of 1998.  The remaining recoveries were offset against
increases in the total amount of environmental reserves.  No assurances can
be given that the Company will be successful in other attempts to recover
incurred or future costs from other insurers or that the amount of
recoveries received will ultimately be adequate to cover costs incurred.

While uncertainties are inherent in the final outcome of these
environmental matters, and it is presently impossible to determine the
actual costs that ultimately may be incurred, management currently believes
that the resolution of such uncertainties should not have a material
adverse effect on the Company's consolidated financial position, results of
operations, or liquidity.

ASBESTOS CONTINGENCIES
KACC is a defendant in a number of lawsuits, some of which involve claims
of multiple persons, in which the plaintiffs allege that certain of their
injuries were caused by, among other things, exposure to asbestos during,
and as a result of, their employment or association with KACC or exposure
to products containing asbestos produced or sold by KACC.  The lawsuits
generally relate to products KACC has not sold for at least 20 years.

The following table presents the changes in number of such claims pending
for the years ended December 31, 1998, 1997, and 1996.

<TABLE>
<CAPTION>
                                                            1998            1997            1996
- ------------------------------------------------------------------------------------------------
<S>                                               <C>             <C>             <C>
Number of claims at beginning of period                  77,400          71,100          59,700 
Claims received                                          22,900          15,600          21,100 
Claims settled or dismissed                             (13,900)         (9,300)         (9,700)
                                                  --------------  --------------  --------------

Number of claims at end of period                        86,400          77,400          71,100 
                                                  ==============  ==============  ==============

</TABLE>

The foregoing claims and settlement figures as of December 31, 1998, do not
reflect the fact that KACC has reached agreements under which it will
settle approximately 30,000 of the pending asbestos-related claims over an
extended period.

Based on past experience and reasonably anticipated future activity, the
Company has established an accrual for estimated asbestos-related costs for
claims filed and estimated to be filed through 2008.  There are inherent
uncertainties involved in estimating asbestos-related costs, and the
Company's actual costs could exceed these estimates.  The Company's accrual
was calculated based on the current and anticipated number of asbestos-related
claims, the prior timing and amounts of asbestos-related payments, and the
advice of Wharton Levin Ehrmantraut Klein & Nash, P.A., with respect to the
current state of the law related to asbestos claims.  Accordingly, an
estimated asbestos-related cost accrual of $186.2, before consideration of
insurance recoveries, is included primarily in Long-term liabilities at
December 31, 1998. While the Company does not presently believe there
is a reasonable basis for estimating such costs beyond 2008 and, accordingly,
no accrual has been recorded for such costs which may be incurred beyond
2008, there is a reasonable possibility that such costs may continue beyond
2008, and such costs may be substantial.  The Company estimates that annual
future cash payments in connection with such litigation will be
approximately $16.0 to $28.0 for each of the years 1999 through 2003, and
an aggregate of approximately $77.0 thereafter.

The Company believes that KACC has insurance coverage available to recover
a substantial portion of its asbestos-related costs.  Although the Company
has settled asbestos-related coverage matters with certain of its insurance
carriers, other carriers have not yet agreed to settlements.  The timing
and amount of future recoveries from these insurance carriers will depend
on the pace of claims review and processing by such carriers and on the
resolution of any disputes regarding coverage under such policies.  The
Company believes that substantial recoveries from the insurance carriers
are probable.  The Company reached this conclusion after considering its
prior insurance-related recoveries in respect of asbestos-related claims;
its existing insurance policies; and the advise of Heller Ehrman White &
McAuliffe with respect to applicable insurance coverage law relating to the
terms and conditions of those policies.  Accordingly, an estimated
aggregate insurance recovery of $152.5, determined on the same basis as the
asbestos-related cost accrual, is recorded primarily in Other assets at
December 31, 1998.

Management continues to monitor claims activity, the status of lawsuits
(including settlement initiatives), legislative progress, and costs
incurred in order to ascertain whether an adjustment to the existing
accruals should be made to the extent that historical experience may differ
significantly from the Company's underlying assumptions.  While
uncertainties are inherent in the final outcome of these asbestos matters
and it is presently impossible to determine the actual costs that
ultimately may be incurred and insurance recoveries that will be received,
management currently believes that, based on the factors discussed in the
preceding paragraphs, the resolution of asbestos-related uncertainties and
the incurrence of asbestos-related costs net of related insurance
recoveries should not have a material adverse effect on the Company's
consolidated financial position, results of operations, or liquidity.

LABOR MATTERS
In connection with the USWA strike and subsequent "lock-out" by KACC,
certain allegations of unfair labor practices ("ULPs") have been filed with
the National Labor Relations Board by the USWA and its members.  KACC has
responded to all such allegations and believes that they are without merit. 
If the allegations were sustained, KACC could be required to make locked-out
employees whole for back wages from the date of the lock-out in January 1999.
While uncertainties are inherent in the final outcome of such matters, the
Company believes that the resolution of the alleged ULPs should not result in
a material adverse impact on the Company's financial position, results of
operations, or liquidity.

OTHER CONTINGENCIES
The Company or KACC is involved in various other claims, lawsuits, and
other proceedings relating to a wide variety of matters. While
uncertainties are inherent in the final outcome of such matters, and it is
presently impossible to determine the actual costs that ultimately may be
incurred, management currently believes that the resolution of such
uncertainties and the incurrence of such costs should not have a material
adverse effect on the Company's consolidated financial position, results of
operations, or liquidity.

10.  DERIVATIVE FINANCIAL INSTRUMENTS AND RELATED HEDGING PROGRAMS

At December 31, 1998, the net unrealized gain on KACC's position in
aluminum forward sales and option contracts, natural gas and fuel oil
forward purchase and option contracts, and forward foreign exchange
contracts, was approximately $17.8 (based on comparisons to applicable
year-end published market prices).  As KACC's hedging activities are
generally designed to lock-in a specified price or range of prices, gains
or losses on the derivative contracts utilized in these hedging activities
will be offset by losses or gains, respectively, on the transactions being
hedged.

ALUMINA AND ALUMINUM
The Company's earnings are sensitive to changes in the prices of alumina,
primary aluminum and fabricated aluminum products, and also depend to a
significant degree upon the volume and mix of all products sold.  Primary
aluminum prices have historically been subject to significant cyclical
price fluctuations.  Alumina prices as well as fabricated aluminum product
prices (which vary considerably among products) are significantly
influenced by changes in the price of primary aluminum but generally lag
behind primary aluminum price changes by up to three months.  Since 1993,
the Average Midwest United States transaction price for primary aluminum
has ranged from approximately $.50 to $1.00 per pound.

From time to time in the ordinary course of business, KACC enters into
hedging transactions to provide price risk management in respect of the net
exposure of earnings resulting from (i) anticipated sales of alumina,
primary aluminum and fabricated aluminum products, less (ii) expected
purchases of certain items, such as aluminum scrap, rolling ingot, and
bauxite, whose prices fluctuate with the price of primary aluminum. 
Forward sales contracts are used by KACC to effectively fix the price that
KACC will receive for its shipments.  KACC also uses option contracts (i)
to establish a minimum price for its product shipments, (ii) to establish a
"collar" or range of price for KACC's anticipated sales, and/or (iii) to
permit KACC to realize possible upside price movements.  As of December 31,
1998, KACC had sold forward, at fixed prices, approximately 24,000 tons of
primary aluminum with respect to 1999.  As of December 31, 1998, KACC had
also entered into option contracts that established a price range for an
additional 125,000 and 72,000 tons of primary aluminum with respect to 1999
and 2000, respectively.  Subsequent to December 31, 1998, KACC has also
entered into additional option contracts that established a price range for
an additional 201,000 tons of primary aluminum with respect to 2000.

Additionally, through December 31, 1998, KACC had also entered a series of
transactions with a counterparty that will provide KACC with a premium over
the forward market prices at the date of the transaction for 2,000 tons of
primary aluminum per month during the period July 1999 through June 2001. 
KACC also contracted with the counterparty to receive certain fixed prices
(also above the forward market prices at the date of the transaction) on
4,000 tons of primary aluminum per month over a three year period
commencing October 2001, unless market prices during certain periods
decline below a stipulated "floor" price, in which case, the fixed price
sales portion of the transactions terminate.  The price at which the
October 2001 and after transactions terminate is well below current market
prices.  While the Company believes that the October 2001 and after
transactions are consistent with its stated hedging objectives, these
positions do not qualify for treatment as a "hedge" under current
accounting guidelines. Accordingly, these positions will be "marked to
market" each period.

As of December 31, 1998, KACC had sold forward virtually all of the alumina
available to it in excess of its projected internal smelting requirements
for 1999 and 2000 at prices indexed to future prices of primary aluminum.

ENERGY
KACC is exposed to energy price risk from fluctuating prices for fuel oil
and natural gas consumed in the production process. Accordingly, KACC from
time to time in the ordinary course of business enters into hedging
transactions with major suppliers of energy and energy related financial
instruments.  As of December 31, 1998, KACC had a combination of fixed
price purchase and option contracts for the purchase of approximately
33,000 MMBtu of natural gas per day during 1999.  At December 31, 1998,
KACC also held a combination of fixed price purchase and option contracts
for an average of 246,000 barrels per month of fuel oil and diesel fuel for
1999.

FOREIGN CURRENCY
KACC enters into forward exchange contracts to hedge material cash
commitments to foreign subsidiaries or affiliates.  At December 31, 1998,
KACC had net forward foreign exchange contracts totaling approximately
$141.4 for the purchase of 210.6 Australian dollars from January 1999
through December 2000, in respect of its commitments for 1999 and 2000
expenditures denominated in Australian dollars.

11.  SEGMENT AND GEOGRAPHICAL AREA INFORMATION

The Company's operations are located in many foreign countries, including
Australia, Canada, Ghana, Jamaica, and the United Kingdom.  Foreign
operations in general may be more vulnerable than domestic operations due
to a variety of political and other risks.  Sales and transfers among
geographic areas are made on a basis intended to reflect the market value
of products.

The Company's operations are organized and managed by product type.  The
Company operates in four segments of the aluminum industry: Alumina and
bauxite, Primary aluminum, Flat-rolled products and Engineered products. 
The Alumina and bauxite business unit's principal products are smelter
grade alumina and chemical grade alumina hydrate, a value-added product,
for which the Company receives a premium over smelter grade market prices. 
The Primary aluminum business unit produces commodity grade products as
well as value-added products such as rod and billet, for which the Company
receives a premium over normal commodity market prices.  The Flat-rolled
products group primarily sells rigid container sheet to can manufacturers
as well as value-added products such as heat treat aluminum sheet and plate
which are used in the aerospace and general engineering markets.  The
Engineered products business unit serves a wide range of industrial
segments including the automotive, distribution, aerospace and general
engineering markets.

The Company uses a portion of its bauxite, alumina and primary aluminum
production for additional processing at its downstream facilities. 
Transfers between business units are made at estimated market prices.  The
accounting policies of the segments are the same as those described in Note
1.  Business unit results are evaluated internally by management before any
allocation of corporate overhead and without any charge for income taxes or
interest expense.

The following segment information differs from that presented in prior
years as a result of the Company's adoption of Statement of Financial
Accounting Standard No.131, as of December 31, 1998.  Prior year
information has been restated to conform to the Company's new presentation
format.

Financial information by operating segment at December 31, 1998, 1997 and
1996 is as follows:

<TABLE>
<CAPTION>
                                                              Year Ended December 31,
                                                  ----------------------------------------------
                                                            1998            1997            1996
- ------------------------------------------------------------------------------------------------
<S>                                               <C>             <C>             <C>
Net Sales:
     Bauxite and Alumina:
          Net sales to unaffiliated customers     $       472.7   $       411.7   $       431.0 
          Intersegment sales                              135.8           201.7           194.1 
                                                  --------------  --------------  --------------
                                                          608.5           613.4           625.1 
                                                  --------------  --------------  --------------
     Primary Aluminum:
          Net sales to unaffiliated customers             409.8           543.4           538.3 
          Intersegment sales                              233.5           273.8           217.4 
                                                  --------------  --------------  --------------
                                                          643.3           817.2           755.7 
                                                  --------------  --------------  --------------
     Flat-Rolled Products                                 714.6           743.3           626.0 
     Engineered Products                                  581.3           581.0           504.4 
     Minority interests                                    78.0            93.8            90.8 
     Eliminations                                        (369.3)         (475.5)         (411.5)
                                                  --------------  --------------  --------------
                                                  $     2,256.4   $     2,373.2   $     2,190.5 
                                                  ==============  ==============  ==============
Equity in income (loss) of unconsolidated
     affiliates:
     Bauxite and Alumina                          $        (3.2)  $        (7.0)  $         1.7 
     Primary Aluminum                                       1.2             5.1             6.7 
     Engineered Products                                    7.8             4.8             -
     Corporate and Other                                    (.4)            -                .4 
                                                  --------------  --------------  --------------
                                                  $         5.4   $         2.9   $         8.8 
                                                  ==============  ==============  ==============
Operating income (loss):
     Bauxite and Alumina                          $        42.0   $        54.2   $        27.7 
     Primary Aluminum                                      49.9           148.3            79.1 
     Flat-Rolled Products                                  70.8            28.2            35.3 
     Engineered Products                                   47.5            42.3            21.7 
     Micromill (1)                                        (63.4)          (24.5)          (14.5)
     Eliminations                                           8.9            (5.9)            8.3 
     Corporate and Other                                  (65.1)          (74.6)          (59.8)
                                                  --------------  --------------  --------------
                                                  $        90.6   $       168.0   $        97.8 
                                                  ==============  ==============  ==============
Depreciation and amortization:
     Bauxite and Alumina                          $        36.4   $        39.4   $        41.5 
     Primary Aluminum                                      29.9            30.4            33.0 
     Flat-Rolled Products                                  16.1            16.0            16.9 
     Engineered Products                                   10.8            11.2            12.1 
     Micromill                                              3.6             3.2              .5 
     Corporate and Other                                    2.3             2.3             3.6 
                                                  --------------  --------------  --------------
                                                  $        99.1   $       102.5   $       107.6 
                                                  ==============  ==============  ==============
Capital expenditures:
     Bauxite and Alumina                          $        26.9   $        27.8   $        29.9 
     Primary Aluminum                                      20.7            42.6            28.1 
     Flat-Rolled Products                                  20.4            16.8            22.7 
     Engineered Products                                    8.4            31.2            18.3 
     Micromill                                               .2             8.3            56.4 
     Corporate and Other                                    1.0             1.8             6.1 
                                                  --------------  --------------  --------------
                                                  $        77.6   $       128.5   $       161.5 
                                                  ==============  ==============  ==============

</TABLE>

(1)  1998 includes $45.0 fourth quarter impairment charge.

<TABLE>
<CAPTION>
                                                                          December 31,
                                                                 ------------------------------
                                                                      1998            1997
- -----------------------------------------------------------------------------------------------
<S>                                                              <C>             <C>
Investments in and advances to unconsolidated affiliates:
     Bauxite and Alumina                                         $        76.8   $        88.3 
     Primary Aluminum                                                     27.6            33.2 
     Engineered Products                                                  23.9            17.5 
     Corporate and Other                                                   -               9.6 
                                                                 --------------  --------------

                                                                 $       128.3   $       148.6 
                                                                 ==============  ==============

Segment assets:
     Bauxite and Alumina                                         $       669.0   $       692.8 
     Primary Aluminum                                                    580.8           633.9 
     Flat-Rolled Products                                                431.2           466.5 
     Engineered Products                                                 294.5           318.6 
     Micromill                                                            25.3            63.4 
     Corporate and Other                                                 990.1           838.7 
                                                                 --------------  --------------

                                                                 $     2,990.9   $     3,013.9 
                                                                 ==============  ==============

</TABLE>

Geographical area information relative to the Company's operations is
summarized as follows:

<TABLE>
<CAPTION>
                                                              Year Ended December 31,
                                                  ----------------------------------------------
                                                       1998            1997            1996
- ------------------------------------------------------------------------------------------------

<S>                                               <C>             <C>             <C>
Net sales to unaffiliated customers:
          United  States                          $      1,698.0  $      1,720.3  $      1,610.0
          Jamaica                                          237.0           204.6           201.8
          Ghana                                             89.8           234.2           198.3
          Other Foreign                                    231.6           214.1           180.4
                                                  --------------  --------------  --------------
                                                  $      2,256.4  $      2,373.2  $      2,190.5
                                                  ==============  ==============  ==============

</TABLE>

<TABLE>
<CAPTION>
                                                                     December 31,
                                                            ------------------------------
                                                                 1998            1997
- ------------------------------------------------------------------------------------------
<S>                                                         <C>             <C>
Long-lived assets: (1)
          United States                                     $        757.9  $        809.5
          Jamaica                                                    289.2           283.4
          Ghana                                                       90.2           100.4
          Other Foreign                                               99.7           127.1
                                                            --------------  --------------
                                                            $      1,237.0  $      1,320.4
                                                            ==============  ==============

</TABLE>

(1)  Long-lived assets include Property, plant, and equipment, net, and
Investments in and advances to unconsolidated affiliates.


The aggregate foreign currency gain included in determining net income was
immaterial for the years ended December 31, 1998, 1997, and 1996.
No single customer accounted for sales in excess of 10% of total revenue in
1998, 1997, or 1996.

Export sales were less than 10% of total revenue during the years ended
December 31, 1998, 1997, and 1996.

12.  SUBSEQUENT EVENTS
During the first quarter of 1999, two potlines at the Company's 90% owned
Valco facility, which were curtailed during most of 1998 (but for which
Valco received compensation from the Volta River Authority in the form of
energy credits) are being restarted. Additionally, during the first quarter
of 1999 KACC began restarting two potlines (representing approximately
50,000 tons of annual capacity) at its Mead, Washington, smelter, which
were originally curtailed in September 1998 as a result of the USWA strike. 
One potline at the Company's Tacoma, Washington, smelter has been prepared
for restart, but remains curtailed due to management's consideration of
market-related and other factors.  The Company's first quarter results will
be adversely impacted by the effect of the restart costs at the Valco and
Mead facilities and the restart preparations at the Tacoma facility.

During February 1999, KACC, through a subsidiary, completed the acquisition
of its joint venture partner's 45% interest in Kaiser LaRoche Hydrate
Partners ("KLHP") for a cash purchase price of approximately $10.0 subject
to post-closing adjustments.  As KACC already owned 55% of KLHP, the
results of KLHP were already included in the Company's consolidated
financial statements.

During January 1999, KACC signed a letter of intent to sell its 50%
interest in AKW, an aluminum wheels joint venture, to its partner.  The
sale, which will result in the Company recognizing a net substantial gain,
is expected to be completed on or about March 31, 1999.  However, as the
transaction is subject to the negotiation of a definitive purchase
agreement, no assurances can be given that the transaction will be
completed.  The Company's equity in income of AKW was $7.8 and $4.8 for the
years ended December 31, 1998 and 1997, respectively.



KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
Q U A R T E R L Y  F I N A N C I A L  D A T A  ( U N A U D I T E D ) 




<TABLE>
<CAPTION>
                                                                           Quarter Ended
                                                  ----------------------------------------------------------------
(In millions of dollars, except share amounts)         March 31,        June 30,   September 30,    December 31,  
- ------------------------------------------------------------------------------------------------------------------
<S>                                               <C>             <C>             <C>             <C>
1998
     Net sales                                    $       597.0   $       614.8   $       541.6   $       503.0 
     Operating income (loss)                               44.8            55.3            30.8           (40.3)   
     Net income (loss)                                     12.0            16.7            10.8 (1)       (38.9)(2)

     Earnings (loss) per share:
          Basic/Diluted                                     .15             .21             .14            (.49)(2)
     Common stock market price:
          High                                               11          11-5/8           9-5/8           7-3/4 
          Low                                             8-1/8           8-7/8           5-5/8           4-5/8 

1997
     Net sales                                    $       547.4   $       597.1          $634.1          $594.6 
     Operating income                                      31.3            35.3            54.5            46.9 
     Net income                                             2.6            13.7 (3)        17.5            14.2 
     Earnings per share:
          Basic/Diluted                                     .01             .16             .22             .18 
     Common stock market price:
          High                                            13-5/8          12-1/4             16           14-7/8
          Low                                             10-7/8          10-1/8          11-5/8           8-3/8


</TABLE>

(1)  Includes two essentially offsetting non-recurring items, a favorable $8.3
     non-cash tax provision benefit resulting from the
     resolution of certain matters and an approximate $10.0 unfavorable gross
     profit impact of preparing for a strike by employees
     represented by the USWA at five locations.
(2)  Includes an unfavorable pre-tax strike-related gross profit impact of
     approximately $50.0, and a non-cash pre-tax charge of
     $45.0 related to impairment of the Company's Micromill assets.
     Excluding these items basic earnings per share would have
     been approximately $.29.
(3)  Includes a $19.7 pre-tax charge for restructuring of operations, an
     offsetting after-tax benefit of $12.5 related to the
     settlement of certain tax matters and a $5.8 pre-tax charge for
     litigation matters.


KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
F I V E - Y E A R  F I N A N C I A L  D A T A 
C O N S O L I D A T E D  B A L A N C E  S H E E T S 


<TABLE>
<CAPTION>

                                                                                   December 31,
                                                  ------------------------------------------------------------------------------
(In millions of dollars)                                    1998            1997            1996            1995            1994
- --------------------------------------------------------------------------------------------------------------------------------
<S>                                               <C>             <C>             <C>             <C>             <C>
ASSETS
Current assets:
     Cash and cash equivalents                    $        98.3   $        15.8   $        81.3   $        21.9   $        17.6 
     Receivables                                          282.7           340.2           252.4           308.6           199.2 
     Inventories                                          543.5           568.3           562.2           525.7           468.0 
     Prepaid expenses and other current assets            105.5           121.3           127.8            76.6           158.0 
                                                  --------------  --------------  --------------  --------------  --------------
          Total current assets                          1,030.0         1,045.6         1,023.7           932.8           842.8 

Investments in and advances to unconsolidated
     affiliates                                           128.3           148.6           168.4           178.2           169.7 
Property, plant, and equipment - net                    1,108.7         1,171.8         1,168.7         1,109.6         1,133.2 
Deferred income taxes                                     377.9           330.6           264.5           269.1           271.2 
Other assets                                              346.0           317.3           308.7           323.5           281.2 
                                                  --------------  --------------  --------------  --------------  --------------
          Total                                   $     2,990.9   $     3,013.9   $     2,934.0   $     2,813.2   $     2,698.1 
                                                  ==============  ==============  ==============  ==============  ==============

Liabilities and Stockholders' Equity
Current liabilities:
     Accounts payable and accruals                $       432.7   $       457.3   $       453.4   $       451.2   $       439.3 
     Accrued postretirement medical benefit
          obligation - current portion                     48.2            45.3            50.1            46.8            47.0 
     Payable to affiliates                                 77.1            82.7            97.0            94.2            85.3 
     Long-term debt - current portion                        .4             8.8             8.9             8.9            11.5 
                                                  --------------  --------------  --------------  --------------  --------------
          Total current liabilities                       558.4           594.1           609.4           601.1           583.1 

Long-term liabilities                                     532.9           491.9           458.1           548.5           495.5 
Accrued postretirement medical benefit obligation         694.3           720.3           722.5           734.0           734.9 
Long-term debt                                            962.6           962.9           953.0           749.2           751.1 
Minority interests                                        123.5           127.7           121.7           122.7           116.2 

Stockholders' equity:
     Preferred stock                                       -               -                 .4              .4              .6 
     Common stock                                            .8              .8              .7              .7              .6 
     Additional capital                                   535.4           533.8           531.1           530.3           527.8 
     Retained earnings (accumulated deficit)             (417.0)         (417.6)         (460.1)         (459.9)         (502.6)
     Accumulated other comprehensive income                -               -               (2.8)          (13.8)           (9.1)
                                                  --------------  --------------  --------------  --------------  --------------
          Total stockholders' equity                      119.2           117.0            69.3            57.7            17.3 
                                                  --------------  --------------  --------------  --------------  --------------
          Total                                   $     2,990.9   $     3,013.9   $     2,934.0   $     2,813.2   $     2,698.1 
                                                  ==============  ==============  ==============  ==============  ==============

Debt-to-capital ratio(1)                                   76.9            77.8            81.2            78.1            82.4 

</TABLE>


(1)  Total of long-term debt - current portion and long-term debt
     (collectively "total debt") as a ratio of total debt, deferred income
     tax liabilities, minority interests, and stockholders' equity.

 KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
 F I V E - Y E A R  F I N A N C I A L  D A T A 
 S T A T E M E N T S  O F  C O N S O L I D A T E D  I N C O M E 
 ( L O S S ) 


<TABLE>
<CAPTION>

                                                                              Year Ended December 31,
                                                  ------------------------------------------------------------------------------
(In millions of dollars, except share amounts)              1998            1997            1996            1995            1994
- --------------------------------------------------------------------------------------------------------------------------------
<S>                                               <C>             <C>             <C>             <C>             <C>

Net sales                                         $     2,256.4   $     2,373.2   $     2,190.5   $     2,237.8   $     1,781.5 
                                                  --------------  --------------  --------------  --------------  --------------

Costs and expenses:
     Cost of products sold                              1,906.2         1,951.2         1,857.5         1,787.0         1,613.9 
     Depreciation and amortization                         99.1           102.5           107.6           105.7           107.0 
     Selling, administrative, research and
          development, and general                        115.5           131.8           127.6           134.5           116.8 
     Impairment of Micromill(TM) assets/
          restructuring of operations                      45.0            19.7            -               -               -
                                                  --------------  --------------  --------------  --------------  --------------
          Total costs and expenses                      2,165.8          2,205.2        2,092.7         2,027.2         1,837.7 
                                                  --------------  --------------  --------------  --------------  --------------

Operating income (loss) (1)                                90.6           168.0            97.8           210.6           (56.2)

Other income (expense):
     Interest expense                                    (110.0)         (110.7)          (93.4)          (93.9)          (88.6)
     Other - net                                            3.5             3.0            (2.7)          (14.1)           (7.3)
                                                  --------------  --------------  --------------  --------------  --------------

Income (loss) before income taxes, minority
     interests, and extraordinary loss                    (15.9)           60.3             1.7           102.6          (152.1)

Benefit (provision) for income taxes                       16.4            (8.8)            9.3           (37.2)           53.8 

Minority interests                                           .1            (3.5)           (2.8)           (5.1)           (3.1)
                                                  --------------  --------------  --------------  --------------  --------------

Income (loss) before extraordinary loss                      .6            48.0             8.2            60.3          (101.4)

Extraordinary loss on early extinguishments of
     debt, net of tax benefit of $2.9                      -               -               -               -               (5.4)
                                                  --------------  --------------  --------------  --------------  --------------
Net income (loss)                                            .6            48.0             8.2            60.3          (106.8)

Preferred stock dividends                                  -               (5.5)           (8.4)          (17.6)          (20.1)
                                                  --------------  --------------  --------------  --------------  --------------
Net income (loss) available to common
     shareholders                                 $          .6   $        42.5   $         (.2)  $        42.7   $      (126.9)
                                                  ==============  ==============  ==============  ==============  ==============

Earnings (loss) per share:
     Basic/Diluted                                $         .01   $         .57   $         .00   $         .69   $       (2.18)

Weighted average shares outstanding (000):
     Basic                                               79,115          74,221          71,644          62,000          58,139 

     Diluted                                             79,156          74,382          71,644          62,264          58,139 

</TABLE>




(1)  1998 includes an adverse strike-related impact of approximately $60.0.



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